The U.S. Government 9% coupon bond has 15 years remaining to maturity. The bond

Question

The U.S. Government 9% coupon bond has 15 years remaining to maturity. The bond pays annual coupons and the next coupon is due on one year. The face value of the bond is $100. The bond is currently trading for $155.59 and yields 4%. If you buy the bond today and hold to maturity, then how much interest do you earn on reinvested coupons (assuming coupons reinvested at the yield rate)? In other words, if you invest the coupons in a bank that pays 4% per annum, then how much interest do you earn just from investing the coupons? How much interest do you earn on reinvested coupons? $ (Round to the nearest cent.)

Explanation / Answer

Interest you would earn on reinvested capital = Annual Coupon*((1+r)^n-1)/r - Annual Coupon*n

Interest you would earn on reinvested capital = (100*9%)*((1+4%)^15-1)/4% - (100*9%)*15

Interest you would earn on reinvested capital = $ 45.21

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