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%

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 6-month yield)
Therefore, (1.03495)2 - 1 = 7.11%




RELATED FAQS
  1. A 10-year, 8% coupon bond is currently trading at 98.5 of par ...

    The correct answer is: a) In your approved calculator, key the following amounts and solve for i: FV = 97.5 PMT = 4 n = 8 ... Read Answer >>
  2. What is the difference between yield to maturity and the coupon rate?

    Read about some of the basic differences between a debt security's coupon rate and its yield to maturity, and learn which ... Read Answer >>
  3. What is the most common solvency ratios used in fundamental analysis?

    Learn about the difference between a bond's coupon rate and its yield rate, how the coupon rate influences market price and ... Read Answer >>
  4. How do debit spreads impact the trading of options?

    Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... Read Answer >>
  5. What types of fees apply to checking accounts?

    Learn about the difference between a bond's coupon rate and its yield to maturity, and how the par value, coupon rate and ... Read Answer >>
  6. How can I calculate a bond's coupon rate in Excel?

    Find out how to use Microsoft Excel to calculate the coupon rate of a bond using its par value and the amount and frequency ... Read Answer >>
Related Articles
  1. Investing

    What is Reinvestment Risk?

    Reinvestment risk refers to the risk that a bond’s future coupons will have to be reinvested at a lower interest rate.
  2. Personal Finance

    Coupon Shopping: Clip Your Way To Savings

    Use coupons strategically to score big savings on everyday purchases.
  3. Investing

    Explaining the Coupon Rate

    Coupon rate is the stated interest rate on a fixed income security.
  4. Personal Finance

    6 Sneaky Ways Coupons Make You Spend More

    If you're hoping to save money by using coupons, watch out for sellers' strategies.
  5. Personal Finance

    6 Tricks To Make Coupons Work For You

    Use these strategies to counteract the stores' and manufacturers' coupon tactics and come out ahead.
  6. Financial Advisor

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  7. Investing

    Why Do Companies Print Coupons?

    Coupons save customers money, but there's also a lot in it for the company.
  8. Investing

    If I Buy A $1,000 10-Year Bond With A 10% Coupon, Will I Receive $100 Each Year?

    Investors can count on a fixed-income security paying them a certain amount of cash as long as the security is held until maturity and the issuer doesn’t default.
  9. Personal Finance

    Couponing 101: Dos and Don'ts

    Coupon clipping isn't new, but it has gone digital. Find out how to use coupons to your advantage today.
  10. Investing

    Risks To Consider Before Investing In Bonds

    Make sure you understand the risks associated with bonds before making an investment decision.
RELATED TERMS
  1. Current Coupon Bond

    A bond with a coupon rate that is within 0.5\% of the current ...
  2. Coupon Bond

    A debt obligation with coupons attached that represent semiannual ...
  3. Coupon

    The annual interest rate paid on a bond, expressed as a percentage ...
  4. Zero-Coupon Bond

    A debt security that doesn't pay interest (a coupon) but is traded ...
  5. Short Coupon

    A payment made on a bond within a shorter time interval than ...
  6. Variable Coupon Renewable Note - VCR

    A renewable fixed income security with variable coupon rates ...
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  5. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  6. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
Trading Center