You have a 3-year investment horizon. You can buy a 10% semi annual coupon, 10 year bond for $1,000. You estimate you can reinvest the coupons at 12% and sell the bond in 3 years time for $1,050. Based on this information, what is your horizon return?
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A. B. C. D.C
1.Find the FV of the coupons and interest on interest:
n = 3(2)=6; i = 12/2 = 6; PMT = 50; compute FV =348.77
2. Determine the value of the bond at the end of 3 years: given = 1,050.00
1,398.77
3. Equate FV (1398.77) with PV (1000) over 3 years (n=6); compute i = 5.75(2) = 11.5%