A four year bond with a 5 coupon1000 face value 8 YTMWith a

A four year bond with a 5% coupon,$1000 face value, 8% YTM,With a 3 year investment horizon and 7% reinvestment rate of coupons, what is the total return?

a. Sell bond in 3 years for $898.74, TR = 5.56%
b. Sell bond in 3 years for $898.74, TR = 6.35%
c. Sell bond in 3 years for $898.74, TR = 7.17%
d. Sell bond in 3 years for $898.74, TR = 4.86%

Please show calculations.

Solution

=((5%*1000*1.07^2+5%*1000*1.07^1+5%*1000+898.74)/(5%*1000/1.08+5%*1000/1.08^2+5%*1000/1.08^3+5%*1000/1.08^4+1000/1.08^4))^(1/3)-1=5.56%