Exhibit 16-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 10 year, 7% coupon bond priced to yield 8%. As a swap candidate you are considering a 10 year, 8% coupon bond priced to yield 9%. Assume a reinvestment at 9%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}
&\text { Current Band } & \text { Candidate Band } \
\hline \text { Dollar Investment } & \$ 932.05 & \$ 934.96 \
\text { Coupon } & \$ 70.00 & \$ 80.00 \
\text { on One Coupon } & \$ 1.575 & ? \
\text { Principal Value at Year End } & \$ 936.70 & ? \
\text { Total Accrued } & \$ 1008.28 & ? \
\text { Realized Compound Yield } & 8.018 \% & ?
\end{array}$
-Refer to Exhibit 16-1. The realized compound yield on the candidate bond is

Question

Exhibit 16-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 10 year, 7% coupon bond priced to yield 8%. As a swap candidate you are considering a 10 year, 8% coupon bond priced to yield 9%. Assume a reinvestment at 9%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}
&\text { Current Band } & \text { Candidate Band } \
\hline  \text { Dollar Investment } & \$ 932.05 & \$ 934.96 \
\text { Coupon } & \$ 70.00 & \$ 80.00 \
\text { on One Coupon } & \$ 1.575 & ? \
\text { Principal Value at Year End } & \$ 936.70 & ? \
\text { Total Accrued } & \$ 1008.28 & ? \
\text { Realized Compound Yield } & 8.018 \% & ?
\end{array}$
-Refer to Exhibit 16-1. The realized compound yield on the candidate bond is

Quizplus · Accepted Answer

The realized compound yield on the candidate bond is calculated by considering the total return over the investment period and then annualizing this return. For the candidate bond, the initial investment is $934.96, and it pays a coupon of $80.00. Assuming reinvestment at 9% semiannually, the interest on one coupon for half a year is $80 * 4.5% = $3.60. Therefore, the total value at the end of the year from coupons and reinvestment is $80 + $3.60 = $83.60. Adding this to the principal value at year-end, which can be assumed to be close to the initial investment since the bond yields 9% and the workout period is one year, gives a total accrued value of approximately $934.96 (initial investment) + $83.60 = $1018.56. The realized compound yield is the percentage increase in value over the initial investment, which can be approximated given the information as closer to 9% than to any other options provided, considering the bond's yield and the reinvestment rate.

Exhibit 16-1 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Exhibit 16-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)