A 20-year maturity corporate bond has a 6.5% coupon rate (the coupons are paid annually). The bond currently sells for $925.50. A bond market analyst forecasts that in 5 years yields on such bonds will be at 7%. You believe that you will be able to reinvest the coupons earned over the next 5 years at a 6% rate of return. What is your expected annual compound rate of return if you plan on selling the bond in 5 years?

Question

Quizplus · Accepted Answer

FV5 of the reinvested coupons is $366.61.
Calculator entries are N = 5, I/Y = 6, PV = 0, PMT = −65, CPT FV 11eaaae8_8b58_d29d_a4b8_7d6d97208bf6_TB6474_11 366.61
Value of the bond at time 5 is $954.46.
Calculator entries are N = 15, I/Y = 7, PMT = −65, FV = −1,000, CPT PV 11eaaae8_8b58_f9ae_a4b8_f3dd44839678_TB6474_11 954.46
Total future value at time 5 = $366.41 + $954.46 = $1,320.87
PV0 = $925.50
($925.50)(1 + r)5 = $1,320.87; r = 7.37%
Or N = 5, PV = −925.50, PMT = 0, FV = 1,320.87, CPT I/Y 11eaaae8_8b58_f9af_a4b8_994aeb3f9d9a_TB6474_11 7.37

A 20-Year Maturity Corporate Bond Has a 6