Three years ago, you purchased a bond for $974.69. The bond had three years to m

Question

Three years ago, you purchased a bond for $974.69. The bond had three years to maturity, a coupon rate of 8% paid annually, and a face value of $1,000. Each year you reinvested all coupon interest at the prevailing reinvestment rate shown in the table below. Today is the bond's maturity date. What is your realized compound yield on the bond?

Time

Prevailing reinvestment rate

0 (purchase date)

6.0%

1

7.2%

2

9.4%

3 (maturity date)

Time

Prevailing reinvestment rate

0 (purchase date)

6.0%

1

7.2%

2

9.4%

3 (maturity date)

Explanation / Answer

Realized compound yield on the bond

= (Vt / V0)1/t - 1

=(1259.45/974.69)1/4 - 1

=8.92%

Time Prevailing reinvestment rate Reinvest Rate Returns 0 (purchase date) 6.00% 0 0 1 7.20% 80 (1.072)2 91.93 2 9.40% 80 (1.094)1 87.52 3 (maturity date) 80 1 80.00 3 (maturity date) 1000.00 Total 1259.45

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