Question

. Suppose that a portfolio manager purchases $10 million of par value of an eight-year bond that has a coupon rate of 7% and pays interest once per year. The first annual coupon payment will be made one year from now. How much will the portfolio manager have if she (1) holds the bond until it matures eight years from now, and (2) can reinvest all the annual interest payments at an annual interest rate of 6.2%?

Answer 1

Answer:

$16,978,160.38

Explanation:

This is an annuity question. You can find the correct answer by calculating the future value of the annual coupons, plus the face value of the bond which is payable at maturity.Using a financial calculator, input the following;

Interest rate ; I/Y = 6.2%

Total duration of reinvestment; N = 8

Recurring payment; PMT = -(7%*10,000,000) = -700,000

One time present cashflow; PV = 0

then compute future value; CPT FV = 6,978,160.381

Add face value of bond; =  $(6,978,160.381 +10,000,000) = $16,978,160.38