Question

You have recently purchased an annual interest-paying bond with a time to maturity of ten years, a yield to maturity of 5%, and coupon rate of 3.8%. If you reinvest the remaining interest payments and principle repayment at an annual rate of 4%, how much money will you have in ten years

Answer 1

$1,456.23

Step-by-step explanation:

Calculation for how much money will you have in ten years

First step is to calculate FV

Using this formula

FV= C*(((1 + i/100)^n -1)/(i/100))

Where,

C represent Cash flow per period

i representinterest rate

n represent number of payments

Let plug in the formula

FV= 38*(((1+ 4/100)^10-1)/(4/100))

FV = 456.23

(Note 3.8%*1000 will give us 38)

Now let calculate how much money you will have in ten years

Using this formula

Amount in 10 years = FV of interest+ Par value

Let plug in the formula

Amount in 10 years= 456.23+1000

Amount in 10 years = $1,456.23

Therefore the amount of money you will have in ten years is $1,456.23