Suppose you buy a 20 year 8% (annual payment) coupon bond for $990 and plan to hold it for 10 years. Your forecast is that the bond’s yield to maturity will be 8.5% when it is sold and that the re-investment rate on the coupons is 6%. At the end of your investment horizon the bonds will have 10 years remaining until expiration.
a. What is the price of the bond when you will sell it?
b. How much did you accumulate in the 10 years by investing the coupons at 6%?
c. How much money do you have at the end of the 10 years?
d. What is your compound return?