Question

Face Value = $1000
Coupon rate = 4%
Maturity = 15 years
Interest rate = 7%

If interest rates were to remain at 7%, what would be the accumulated coupon income in year 3?

Answer 1

Face Value = $ 1000

Coupon rate = 4%

Annual coupon payment = $1000*4%

= $40

As interest rate remains same as 7%.

We have to calculate the accumulated Coupon Income in year 3 which means that we will reinvest the coupon income received annually starting from year end 1 to year 3 with Interest rate at 7%.

Accumulated Coupon Income= 40(1+0.07)^2 + 40(1+0.07)^1 + 40(1+0.07)^0

= 45.796 + 42.8 + 40

= $ 128.596

So, the accumulated coupon Income in year 3 is $ 128.596

If you need any clarification, you can ask in comments.     

If you like my answer, then please up-vote as it will be motivating