You have invested $1,000 in a 12% coupon bond that matures in three years. You are investing the interest income in a fund earning 8%. At the end of three years, what will be your portfolio sum?

Question

Quizplus · Accepted Answer

First, let's calculate the coupon payment for each year:

Coupon payment = Coupon rate x Face value = 0.12 x $1,000 = $120

Since the bond matures in three years, you will receive three coupon payments. You will reinvest each of these payments at 8%. Therefore, your future value after three years will be:

FV = $1,000 x (1.12)^3 + $120 x (1.08)^2 + $120 x (1.08)^1 + $120 x (1.08)^0 
FV = $1,389.57

Therefore, your portfolio sum at the end of three years will be $1,389.57.

You Have Invested $1,000 in a 12% Coupon Bond That