Question

You are planning to buy a corporate bond with a 7-year maturity that pays 7% coupon interest. The bond is priced at $108,500 per $100,000 par value. You expect to sell the bond in 2 years when a similar-risk 5-year bond is priced to yield 7.2% annually to maturity. Assuming that you can reinvest all cash flows at an 8% annual rate (4% semiannually), calculate your expected total return over the two-year holding period.

Answer 1

Current price	$108,500.00
Price 2 years hence	$99,172.52
Cash Flow
Period	Cash Flow	FV
0	($108,500.00)
1	7000.00	7874.05
2	7000.00	7571.20
3	7000.00	7280.00
4	106172.52	106172.52
	Total	128897.76
Rate	4.40%
Annualised rate	8.80%