. For each of the bonds and reinvestment rates listed below calculate the amount

Question

. For each of the bonds and reinvestment rates listed below calculate the amount of money accumulated at the end from a $1000 initial investment. Assume annual compounding (a) Invest $1000 in a 5-year zero coupon bond with a yield to maturity of 9 percent. (b) Buy a 5-year 9% annual coupon bond at par ($1000) and reinvest the annual coupons at 9%. (c) Same as (b) but reinvest the annual coupons at 12%. (d) Same as (b) but reinvest the annual coupons at 6%. (e) For (a) through (d) calculate the holding period return. What can you conclude about the relationship between yield to maturity and holding period return?

Explanation / Answer

(a) For a ZCB Price = Face value/(1+i)n

Price = 1000/(1.09)5 = 251.87. So accumulated money in 5 years =1000-251.87=741.83

(b) For this the calculation is as follows:-

  

So the amount to be received at end of 5 year is 1538.62 out of which 538.62 is intterest.

Note:- The intterest is calculated at 9% rate on Begining price.

(c) For this also same as above but intterest will be calculated at 12% p.a.

1762.342

(d)

For this also same as above but intterest will be calculated at 6% p.a.

Beginning price intterest Closing price 1000 90 1090 1090 98.1 1188.1 1188.1 106.93 1295.03 1295.03 116.55 1411.58 1411.58 127.04 1538.62

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