Question bond math
Can anyone help me out with this question please? Thanks!
An investor buys a 4 year, 4.375% annual coupon payment bond at 102 (percent of par value), collects the first coupon and reinvests at 2.25% for the second year, and then reinvests those proceeds along with the receipt of the second coupon at 2.50% for he third year. The investor then sells the bond at a price of 101 (percent of par value) immediately after collecting the third coupon payment. The horizon yield on the bond, i.e., annual holding-period rate of return over the three years, is closest to:
a) 3.912% b) 4.815% c) 3.878% d) 3.815%
Send it over to your product partners.
Y0 CF = -102 Y1 CF = 0 Y2 CF = 0 Y3 CF = 101 + 4.375 + 4.375 * (1 + 2.5%) + 4.375 * (1 + 2.5%) * (1 + 2.25%) Run Excel and calculate the IRR. It's 3.912%.
And no, the question is not impossible, it's just basic math...
We monkeys know how to move logos around though.
How come you didn't discount the $101 principal that was sold after Y3?
Yes, we do discount that 101. It's called calculating the IRR.
For Y3 CF, why is it 101 + 4.375 + 4.375 * (1 + 2.5%) + 4.375 * (1 + 2.5%) * (1 + 2.25%) and not 101 + 4.375 + 4.375 * (1 + 2.25%) + 4.375 * (1 + 2.25%) * (1 + 2.5%)?
The 1st coupon of 4.375 will become 4.375 * (1 + 2.25%) * (1 + 2.5%). The 2nd coupon will become 4.375 * (1 + 2.5%).
Totam accusamus itaque vel quaerat dolor. Distinctio nobis corrupti autem repellat placeat distinctio nemo. In quaerat ad impedit unde est. Fugiat fugit sit perspiciatis voluptatibus et eaque.
Nostrum sed ab tempore voluptas dolores. Dolor eaque eum natus eius rerum. Officiis omnis sapiente ea sint dolorum officia delectus. Natus voluptates suscipit quisquam reiciendis quasi reprehenderit.
Neque dolorem aperiam fugiat libero molestias et. Quae cum consequatur incidunt voluptates eius aliquid.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...