Question

Please answer each step to get to the final answer without using excel. Thank you!

Suppose that an investor with a 10-year investment horizon is considering purchasing a 20-year 8% coupon bond selling for $900. The par value of the bond is $1000. The original YTM on the bond is 10%, but the investor expects that he can reinvest the coupon payments at an annual interest rate of 7% and that at the end of the investment horizon this 10-year bond will be selling to offer a yield of 9%. What is the total return for this bond?

Step 1: Compute the total coupon payments plus the interest in coupons:

Step 2: Determine the projected sale price at the end of ten years:

Step 3: Adding the amounts in steps 1 and 2 gives total future dollars of how much?

Step 4: Obtain the semiannual total return:

Step 5: Obtain the annual total return:

Answer 1