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Assume you purchase (at par) one 12-year bond with a 6.10 percent coupon and a $1,000 face value. Suppose you are only able to reinvest the coupons at a rate of 4.10 percent. If you sell the bond after 7 years when the yield to maturity is 7.10 percent, what is your realized yield? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Answer is complete but not entirely correct. FV Selling price Realized yield $ 1,442.37 X $ 959.11 5.37 %

Assume you purchase (at par) one 12-year bond with a 6.10 percent coupon and a $1,000 face value. Suppose you are only able to reinvest the coupons at a rate of 4.10 percent. If you sell the bond after 7 years when the yield to maturity is 7.10 percent, what is your realized yield? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Answer is complete but not entirely correct. FV Selling price Realized yield $ 1,442.37 X $ 959.11 5.37 %

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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**Understanding Bond Realized Yield** Imagine you decide to invest in a 12-year bond with a face value of $1,000 and a 6.10% coupon rate. You can reinvest the coupon payments at 4.10%. After holding the bond for 7 years, the yield to maturity is 7.10%, and you choose to sell the bond. What is the realized yield? Here’s a breakdown of key components and calculations: **Calculations Table:** - **Future Value (FV):** $1,442.37 (incorrect) - **Selling Price:** $959.11 - **Realized Yield:** 5.37% The calculations show intermediate steps are not rounded; only final answers are rounded to two decimal places. The answer provided is noted as complete but not entirely correct, indicating a possible error in calculating the future value. This exercise demonstrates understanding bond yield calculations, focusing on selling price and reinvestment rates.
Transcribed Image Text:**Understanding Bond Realized Yield** Imagine you decide to invest in a 12-year bond with a face value of $1,000 and a 6.10% coupon rate. You can reinvest the coupon payments at 4.10%. After holding the bond for 7 years, the yield to maturity is 7.10%, and you choose to sell the bond. What is the realized yield? Here’s a breakdown of key components and calculations: **Calculations Table:** - **Future Value (FV):** $1,442.37 (incorrect) - **Selling Price:** $959.11 - **Realized Yield:** 5.37% The calculations show intermediate steps are not rounded; only final answers are rounded to two decimal places. The answer provided is noted as complete but not entirely correct, indicating a possible error in calculating the future value. This exercise demonstrates understanding bond yield calculations, focusing on selling price and reinvestment rates.
**Bond Investment Example** *Scenario:* Assume you purchase (at par) one 12-year bond with a 6.10 percent coupon and a $1,000 face value. Suppose you are only able to reinvest the coupons at a rate of 4.10 percent. If you sell the bond after 7 years when the yield to maturity is 7.10 percent, what is your realized yield? (Do not round intermediate calculations. Round your answers to 2 decimal places.) *Results:* - **Answer is complete but not entirely correct.** | Component | Value | Status | |-------------------|-----------|---------| | FV (Future Value) | $483.26 | ❌ | | Selling Price | $959.11 | ✅ | | Realized Yield | 5.37% | ✅ | *Explanation of Table:* - **FV (Future Value):** The calculated future value of the bond was expected to be $483.26, but this answer is marked incorrect. - **Selling Price:** The calculated selling price after 7 years is $959.11, marked correct. - **Realized Yield:** The calculated annualized realized yield is 5.37%, also marked correct. This example demonstrates calculating the realized yield when reinvesting coupon payments at a different rate than the bond's coupon rate and selling the bond before maturity.
Transcribed Image Text:**Bond Investment Example** *Scenario:* Assume you purchase (at par) one 12-year bond with a 6.10 percent coupon and a $1,000 face value. Suppose you are only able to reinvest the coupons at a rate of 4.10 percent. If you sell the bond after 7 years when the yield to maturity is 7.10 percent, what is your realized yield? (Do not round intermediate calculations. Round your answers to 2 decimal places.) *Results:* - **Answer is complete but not entirely correct.** | Component | Value | Status | |-------------------|-----------|---------| | FV (Future Value) | $483.26 | ❌ | | Selling Price | $959.11 | ✅ | | Realized Yield | 5.37% | ✅ | *Explanation of Table:* - **FV (Future Value):** The calculated future value of the bond was expected to be $483.26, but this answer is marked incorrect. - **Selling Price:** The calculated selling price after 7 years is $959.11, marked correct. - **Realized Yield:** The calculated annualized realized yield is 5.37%, also marked correct. This example demonstrates calculating the realized yield when reinvesting coupon payments at a different rate than the bond's coupon rate and selling the bond before maturity.
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