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Jane Walker has set a 7% yield as the goal for the bond portion of her portfolio. To achieve this goal, she has purchased a 7%, 15-year corporate bond at a discount price of 93.50. What amount of reinvestment income will she need to earn over this 15-year period to achieve a compound return of 7% on a semiannual basis?
A)
$459.
B)
$624.
C)
$574.
Explanation
935(1.035)30 = $2,624
Bond coupons: 30 × 35 = $1,050
Principal repayment: $1,000
2,624 − 1,000 − 1050 = $574 required reinvestment income
(Study Session 15, Module 46.1, LOS 46.a)
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The explanation seems to have incorrect notation and missing the power function. Also I’m not sure whether the bond price stated in the question as 93.50 or 935.0? Because the answer shows 935 but I’ve used 93.50 as what you copied down, but the principle is the same (but assuming a $100 par instead of $1,000 par like the explanation)
Total future cash flows = 93.50 * (1.035)^ 30 = 262.435
Bond coupons = 15 * $7 = 105
Principal repayment = $100
So reinvestment income = 262.435 – 105 – 100 = $57.435
What part of the question/answer do you not understand? Will see if I can explain
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