Chartered Financial Analyst Level 1
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An analyst evaluates a bond with the following characteristics:
- Par value: 100
- Coupon rate: 5.50%
- Coupon frequency: Annual
- Time to maturity: 5 years
- Holding period: 3 years
If the market discount rate during the holding period is 4.75%, the future value of the reinvested coupons at the end of the holding period is closest to:
An analyst evaluates a bond with the following characteristics:
- Par value: 100
- Coupon rate: 5.50%
- Coupon frequency: Annual
- Time to maturity: 5 years
- Holding period: 3 years If the market discount rate during the holding period is 4.75%, the future value of the reinvested coupons at the end of the holding period is closest to:
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Explanation:
The correct answer is B (17.30).
Explanation:
- The first coupon is reinvested at 4.75% for two years.
- The second coupon is reinvested at 4.75% for one year.
- The third coupon is not reinvested.
The calculation is as follows:
Key Concept: The interest rates used for reinvestment are the market discount rates at the time of purchase and sale if the bond is not held to maturity. This question tests the understanding of reinvestment risk and the calculation of future values of coupon payments in fixed-income securities.