the answer is: 5.99141% Please show all steps rter if rtible I (2) An investor w

Question

the answer is: 5.99141%
Please show all steps

rter if rtible I (2) An investor wishes to have an annual (effective) yield of 7%. With this goal C/ in mind, he purchases a twelve-year $1,000 par-value bond with 10% coupons payable quarterly. The price he pays for this bond is based on the investor earning an annual yield of exactly 7% and the assumption that the reinvestment annual effective rate of interest on coupons will be 7%. In fact, the investor only earns 4% nominal interest convertible quarterly on the coupons, which are each reinvested at the moment they are paid. What is the investor's actual annual yield rate? nual rity

Explanation / Answer

Coupons=10%*1000/4=25

Price=25/1.0175+25/1.0175^2............25/1.0175^48+1000/1.0175^48

hence, price=1242.204

For yield calculation:

4% nominal convertible quarterly

0=-1242.204+(25*1.01^47.......................25+1000)/(1+r/4)^48

Hence, r=5.9738%

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