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Calculate the total return on bond equivalent basis

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1. Suppose that an investor has 6 years investment horizon. The investor is considering a 15-year semi-annual coupon bond selling at par and having a coupon rate of 9%. The investor expectations are as follows:

  • The first 4 semi-annual coupon payments can be reinvested from the time of receipt to the end of the investment horizon at an annual interest rate of 8%.
  • The last 8 semi-annual coupon payments can be reinvested from the time of receipt to the end of the investment horizon at a 10% annual interest rate.

Investor believes that the required return on a 9-year bond of this quality at the end of the investment horizon will be 10.6%.

(a) Calculate the total return on bond equivalent basis?

(b) What is the total return on effective rate basis?

Reference no: EM132842758

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