You purchased a $1,000 par value 20-year 4% coupon bond with semi-annual payments for $1,000. Immediately after the purchase, interest rates increased and the yield to maturity and coupon reinvestment rate increased to 6%. (the coupons themselves stayed at 4%) Interest rates and the yield to maturity remain at 6% and you sell the bond 5 years later, having reinvested the coupons at 6%. How much is in your account (proceeds from bond sale and value of all coupons after reinvesting them) after you sell the bond? Hint: one of the steps is to calculate the selling price of the bond.
Sale proceeds after 5 years= $914.70
Accumulated value of interest at 6% per year= $229.29
Money available (sale price + interest accumulated)= $1,143.98
Calculations as below:
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