1. You purchase a high-yield, junk bond for $1,000 that pays $140 annually. Afte

Question

1. You purchase a high-yield, junk bond for $1,000 that pays $140 annually. After buying the bond, yields decline and you are able to reinvest the interest at only 9 percent. You reinvest all the interest payments. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /?>

How much will you have when the bond is retired after 12 years? What was the annual return you earned on this investment?

Rate Nper Pmt PV Type FV Add the initial principal ($1,000) to your FV Solve for total return on your $1,000 cash out flow Nper Pmt PV FV Type Annual Return Rate Annual Return

Explanation / Answer

You purchase a high-yield, junk bond for $1,000 that pays $140 annually. After buying the bond, yields decline and you are able to reinvest the interest at only 9 percent. You reinvest all the interest payments. How much will you have when the bond is retired after twelve years? What was the annual return you earned on this investment?



a. $1887 and 12.5 %

b. $3787 and 12.92 %

c. $3820 and 11.82 %

d. $2357 and 11.32 %

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