Exhibit 19.7
Use the Information Below for the Following Problem(S)
Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9% per year, and a face value of $1000. Bond B has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9.5% per year, and a face value of $1000.
-Refer to Exhibit 19.7.Calculate the percentage gain per invested dollar for Bond A assuming a one year horizon,and a reinvestment rate of 9% per year.

Question

Quizplus · Accepted Answer

The purchase price is = $896.81 =
 $40 \left( \frac { 1 - \frac { 1 } { 1.045 ^ { 60 } } } { .045 } \right) + \frac { 1000 } { 1.045 ^ { 60 } }$ 
The selling price after 1 year is = $897.54 =
 $40 \left( \frac { 1 - \frac { 1 } { 1.045 ^ { 58 } } } { .045 } \right) + \frac { 1000 } { 1.045 ^ { 58 } }$ 
The terminal value of cash flows at year 1 = $979.34 =
 $40 \left( \frac { 1.045 ^ { 2 } - 1 } { .045 } \right) + 897.54$ 
The percentage gain per invested dollar = 9.2% =
 $\left( \frac { 979.34 } { 896.81 } \right) - 1$

Exhibit 19.7 Use the Information Below for the Following Problem(S)