Question

An investor is considering the purchase of a 20-year 7% coupon bond selling for $816 and a par value of $1,000. The yield to maturity for this bond is 9%. Assume the investor’s horizon is 15 years. Market participants expect the yield rate for comparable issues to be 10% for the first 10 years and 6% for years 11 to 20.

1. What is the projected sale price at the end of five years?

2. What is total coupon payments plus the interest on interest at the end of five years? Note, there are two different yield rates for this period.

3. What is the ANNUALIZED total return in percentage?

Answer 1

1. Projected Sale Price at the end of Five years= $ 1067.612

Particulars	Year 6	Year 7	Year 8	Year 9	Year 10	Year 11	Year 12	Year 13	Year 14	Year 15	Year 16	Year 17	Year 18	Year 19	Year 20
Cash Inflow	70	70	70	70	70	70	70	70	70	70	70	70	70	70	1070
Discounting rate	1.1	1.21	1.331	1.4641	1.61051	1.418519	1.50363	1.593848	1.689479	1.790848	1.898299	2.012196	2.132928	2.260904	2.396558
Discounted Cash Inflows	63.63636	57.85124	52.59204	47.81094	43.46449	49.34724	46.554	43.91887	41.43289	39.08763	36.87513	34.78786	32.81873	30.96107	446.4736
Total	1067.612

total coupon payments plus the interest on interest at the end of five years

Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
Coupon Payments	70	70	70	70	70
Interest earned @9%		6.3	13.167	20.65203	28.81071
Total	419