Suppose Jill buys the 5-year bond with a 10% annual coupon rate and $1,000 maturity value, and YTM of 10%, and sells it at the end of 4 years
to meet her investment horizon of 4 years, and right after her purchase rates fall to 8%.
What will be the future value of the coupons and the price she sells bond for at the end of year 4, and what will her annual compound yield be?

Question

Suppose Jill buys the 5-year bond with a 10% annual coupon rate and $1,000 maturity value, and YTM of 10%, and sells it at the end of 4 years
 to meet her investment horizon of 4 years, and right after her purchase rates fall to 8%.
 What will be the future value of the coupons and the price she sells bond for at the end of year 4, and what will her annual compound yield be?

Quizplus · Accepted Answer

FV of Coupons = $100 (FVIFA 8%, 4) = $100(4.5061) = $450.60 
 FVIFA = [(1 + r)^n - 1] / r = {(1.08)^4 - 1]/.08 = 4.5061 
Price Jill will sell the bond for = $1100/(1.08) = $1,018.52. 
Total FV = FV of coupon payments + Price Sell Bond for 
= $450.60 + $1,018.52 = $1,469.12 
Annual Compound Yield = (FV / PV)^1/n - 1 
= [1,469.12/$1,000 Paid for Bond]^1/4 - 1 
= (1.4691)^.25 - 1 = .1009 or 10.09%

Suppose Jill Buys the 5-Year Bond with a 10% Annual