Ken invests in a 5-year bond that sells at its maturity value of $1,000 with its annual coupon rate of 10% equal to the YTM for similar bonds of 10%. Immediately after the purchase, rates rise and stay at 12%, and Ken sells the bond at the end of year 4.
What will be the total of the future value of the coupon payments at the end of year 4 and the price the bond will sell for bond sell for at the end of year 4, and what will be Ken's annual compound return?

Question

Quizplus · Accepted Answer

Price you receive = $1,100/(1.12) = $982.14 
Future Value of Coupons: FVa = $100(4.779*) = $477.90 
FVIFA factor as: {[(1 + r)^n] - 1} / r , so here = {[(1.12)^4] - 1}/.12= 4.779 
So ACY = [$1,460.08/1000]^1/4 - 1 = [1.46]^.25 - 1 = .0992 or 9.92%

Ken Invests in a 5-Year Bond That Sells at Its