Consider a 35 year coupon bond with a face value of $1,000 that pays $80 annual coupons (beginning one year from today).Assume that you invest each coupon in a bank that pays 8% interest.By the maturity date of the bond,how much interest have you earned by investing the coupons? Express your answer as a proportion of all of the money that you have received from owning the bond by the maturity date.

Question

Quizplus · Accepted Answer

Step 1 - Calculate the future value of the coupon payments.
FV = C × 11ea7fdb_fbff_012f_a768_e72889f0859e_TB2902_11 FV = 80 × 11ea7fdb_fbff_0130_a768_49713dc6fc06_TB2902_11 = $13,785.34
Using a financial calculator:
N = 35, I/Y = 8 PV = 0, PMT = -80, cpt FV = $13,785.34
Step 2 - Calculate how much interest is earned on the coupons.
13,785.34 - (35 × 80) = $10,985.34
Step 3 - Sum all of the funds from owning the bond.
1,000 + 13,785.34 = $14,785.34
Step 4 - Calculate interest earned as a proportion of all money received from owning the bond. 11ea7fdb_fbff_0131_a768_bb956eec6a60_TB2902_11 = 74.3%

Consider a 35 Year Coupon Bond with a Face Value