Exhibit 16-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a substitution swap: You currently hold a 15 year, 7% coupon bond priced to yield 8%. As a swap candidate you are considering a 15 year, 7% coupon bond priced to yield 8.5%. Assume a reinvestment rate of 8.5%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}
&\text { Current Band } & \text { Candidate Band } \
\hline \text { Dollar Investment } & \$ 913.54 & ? \
\text { Coupon } & 70.00 & 70.00 \
\text { i on One Coupon } & 1.487 & 1.487 \
\text { Principal Value at Year End } & 916.68 & 878.55 \
\text { Total Accrued } & 988.17 & 950.04 \
\text { Total Gain } & 74.63 & ? \
\text { Gain per Invested Dollar } & ? & ? \
\text { Realized Compound Yield } & ? & ?
\end{array}$
-Refer to Exhibit 16-2. The dollar investment in the candidate bond is

Question

Exhibit 16-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a substitution swap: You currently hold a 15 year, 7% coupon bond priced to yield 8%. As a swap candidate you are considering a 15 year, 7% coupon bond priced to yield 8.5%. Assume a reinvestment rate of 8.5%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}
&\text { Current Band } & \text { Candidate Band } \
\hline  \text { Dollar Investment } & \$ 913.54 & ? \
\text { Coupon } & 70.00 & 70.00 \
\text { i on One Coupon } & 1.487 & 1.487 \
\text { Principal Value at Year End } & 916.68 & 878.55 \
\text { Total Accrued } & 988.17 & 950.04 \
\text { Total Gain } & 74.63 & ? \
\text { Gain per Invested Dollar } & ? & ? \
\text { Realized Compound Yield } & ? & ?
\end{array}$
-Refer to Exhibit 16-2. The dollar investment in the candidate bond is

Quizplus · Accepted Answer

The dollar investment in the candidate bond can be calculated using the given information. The total accrued for the candidate bond is $950.04, which includes the principal value at year end ($878.55) and the interest on one coupon ($1.487) for two periods (since it's semiannual), plus the coupon amount ($70). Since the total accrued ($950.04) includes the dollar investment plus the total gain, and given that the principal value at year end is $878.55, we can infer that the initial investment must be lower than this value to account for the gain over the year. Among the given options, $874.16 (Option C) is the closest value below the principal value at year end that aligns with the structure of the bond's pricing and yield characteristics.

Exhibit 16-2 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Exhibit 16-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)