Sarah is considering the purchase of a 20-year 7% coupon bond selling for $816 and a par value of $1,000. The yield to maturity for this bond is 9%. Answer the following questions. (a) Suppose that instead of investing in the bond, Sarah invests $816 for 20 years earning 9%, compounded semiannually. How much is the investment worth in dollar terms at the end of 20 years? (b) What are the total undiscounted coupon payments that Sarah receives over the life of the bond? (Hint: Simply multiply the value of each coupon times the number of coupons received) (c) What is the future dollar value of the coupon payments and the repayment of principal at the end of 20 years?
Sarah is considering the purchase of a 20-year 7% coupon bond selling for $816 and a par value of $1,000. The yield to maturity for this bond is 9%. Answer the following questions. (a) Suppose that instead of investing in the bond, Sarah invests $816 for 20 years earning 9%, compounded semiannually. How much is the investment worth in dollar terms at the end of 20 years? (b) What are the total undiscounted coupon payments that Sarah receives over the life of the bond? (Hint: Simply multiply the value of each coupon times the number of coupons received) (c) What is the future dollar value of the coupon payments and the repayment of principal at the end of 20 years?
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
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Transcribed Image Text:6. Reinvestment Rate.
Sarah is considering the purchase of a 20-year 7% coupon bond selling for $816 and a par
value of $1,000. The yield to maturity for this bond is 9%. Answer the following questions.
(a) Suppose that instead of investing in the bond, Sarah invests $816 for 20 years earning 9%,
compounded semiannually. How much is the investment worth in dollar terms at the end
of 20 years?
(b) What are the total undiscounted coupon payments that Sarah receives over the life of the
bond? (Hint: Simply multiply the value of each coupon times the number of coupons received)
(c) What is the future dollar value of the coupon payments and the repayment of principal
at the end of 20 years?
(d) For the bond to produce the same level of future value as the investment in part (a), what
should be the fixed reinvestment rate on the coupons?
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