BOND

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

BOND

Postby swarnendupathak » Sun Oct 28, 2012 11:53 pm

A bond portfolio manager invests USD 20mn in a bond issued at par that matures in 30 years & which promises to pay an annual interest rate of 9%. the interest is paid once per year, payments are reinvested at an annual interest rate of 8%. The first payment is one year from today. What is the annual yield on his investment?

Please help....

Swarnendu

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: BOND

Postby content.pristine » Mon Oct 29, 2012 3:21 pm

A single coupon payment = 20MN * 9% = 1,800,000
The Principal Repaid at the end = 20,000,000
The Future Value of the Reinvestment amount of all the coupons =>
i/y=8% N=30 PMT=1,800,000 PV=0 , CMP FV = 203,909,780
The Amount of money received at the end of 30 years = Principal + FV of Reinvestments = 20,000,000 + 203,909,780 = 223,909,780

The return on investment = (Vn/V0)^(1/n)-1 (using compound interest formula)
=(223,909,780/20,000,000)^(1/30)-1 = 8.38%

This is a good question. What is its source?
8-)

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: BOND

Postby swarnendupathak » Mon Oct 29, 2012 3:33 pm

Thanks, got it by googling....

Swarnendu


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