Q:
A:
A 6.4% coupon bond that is expected to mature in five years is currently trading at 96.825. If the annualized reinvestment rate is expected to be 5.8%, what will this bond's effective annual total return be?
A) 6.63%
B) 7.17%
C) 7.11%
D) 6.39%
A) 6.63%
B) 7.17%
C) 7.11%
D) 6.39%
The correct answer is: C)
Step 1: Future value of reinvested coupons.
PMT =
3.20; n = 10; I = 2.9%
Therefore, FV = 36.516
Step 2: Total FV at maturity = (FV of coupons + Par)
= 36.516 + 100
= 136.516
Step 3:
Calculate Holding Period Return
= 136.156/96.825  1 = 40.99%
Step 4: Calculate the effective annual total return
(1.4099)^{1/5}  1 = 7.11%
or,
(1.4099)^{1/10}  1 = 3.495% (this is the effective 6month yield)
Therefore, (1.03495)^{2}  1 = 7.11%
RELATED FAQS

In the beginning of this year, the total par value of all CCCrated bonds were $12 ...
The correct answer is: d) (i) Default Loss Rate = [($1.3 billion  $625 million)/$1.3 billion] = 51.9% (ii) Dollar Default ... 
A manager wishes to construct a portfolio by investing 25% in a stock half as volatile ...
The correct answer is: b) Step 1. Find Portfolio Beta Beta of the Portfolio = (.25)(.5)+(.25)(2)+(.25)(1)+(.25)(0) = 0.125 ... 
Which of the following statements least accurately describes the ways in which a ...
The correct answer is: a) If the winning party simply terminates the swap, then he'll get zero for it. If a swap has value, ... 
Which of the following statements is (are) true with respect to the coefficient ...
The correct answer is: c) (I) is incorrect because coefficient of determination will always be positive, whereas correlation ...
RELATED TERMS
 No results found.