You are planning to retire in 15 years and would like to invest all your current

Question

You are planning to retire in 15 years and would like to invest all your current savings in bonds issued by your state. The bonds have the face value of $5,000, annual coupon rate of 6.8 percent, and maturity of 35 years. The bonds are currently priced to yield 5.2 percent. You expect to be able to reinvest the semiannual coupon payments you will receive over your investment horizon at the annual rate of 4.6 percent. You also expect that the annual yield for comparable bonds at the time you plan to sell your bonds in 15 years (end of your investment horizon) will be 6.2 percent. What is the expected annual realized compound yield of these bonds? (Do not round intermediate calculations and round your final answers to 3 decimal places. (e.g., 32.167))

Explanation / Answer

coupon payment per period = 6.8% * 5000 = 340

FV of coupon payemnts after reinvested

= 340 * [(1+0.046)^15-1]/0.046

= 7119.66

expected annual compund yield

= (7119.66/5000)^(1/15) - 1

= 2.384%

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