You have a planning horizon of H = 6 years and with to immunize your investment

Question

You have a planning horizon of H = 6 years and with to immunize your investment for that horizon. You attempt to do so by buying a perpetual bond that pays $100 annually and has a YTM of 20% p.a. You will reinvest the coupons throughout this 6-year period and, additionally, you will sell the bond at the end of that 6-year period. Find the total cash flow you will have 6 years from now if interest rates remain unchanged throughout your planning horizon. Give the answer with two decimals; e.g., 1,234.56. As always, do not include the dollar sign in your answer.

Explanation / Answer

Period = 6 years

Coupon = 100

YTM = Rate = 20%

Total cash flow at the end of 6 years is computed as = FV(20%,6,100) = $992.99 from coupons + Par value of bond assuming $1000

ANSWER 1992.99

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