11 The manager of a taxexempt fund is considering investing

11. The manager of a tax-exempt fund is considering investing $100,000 in a debt instrument that pays 3% semi-annual coupons for 2 years. At the end of 2nd year, the manager plans to reinvest the proceeds for three more years. The BEY during this 5-year period is 4%. What is the future value of this investment after 5 years?  Round the final answer to nearest cents.

Solution

The future value of this investment = PV*(1+r)^n

where PV is the invested value = 100,000, r is the average return over the 5 year period = 4% and n = 5

The future value of this investment = 100,000*1.04^5 = $121,665.29