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 five years yield rates on these bonds will be at 7.0%.You believe that you will be able to reinvest the coupons earned over the next five years at a 6% rate of return.What is your expected annual compound rate of return if you plan on selling the bond in five years?

Question

Quizplus · Accepted Answer

To find the expected annual compound rate of return, calculate the future value of the bond and the reinvested coupons, then determine the rate that equates the present value of these cash flows to the current bond price. The bond's price in five years, given a 7% yield, is calculated using the bond's remaining cash flows. The reinvested coupons are compounded at 6%. The expected annual compound rate of return is approximately 7.37%.

A 20 Year Maturity Corporate Bond Has a 6