3.26.2005

Q: What is the reinvestment income if...

...an investor holds a 14.00%, 17.50 year bond bought at $950.00 to maturity, assuming rates remain constant?

A

  • Required Rate of Return = current yield/2 = Annual interest payment / Bond price / 2= 14/950 / 2= 0.7%
  • FV of total Interest Payments = Annuity * ( ((1 + r)^N - 1) / r )= $70.00 * ( ((1 + 0.7%)^35 - 1) / 0.7% ) = $2765.31
  • Coupon Interest Payments = 14% * $1000 * 17.50 = $2,450.00
  • Reinvestment income = FV of total Interest Payments - Coupon Interest Payments = $2765.31 - 2450 = $315.31

Category: C++ Quant > Debt > Valuation

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