Practice Exam Question Reinvestment Risk question, investor, generated

johnnyBuz

Hey guys/girls have another question I need help on, if you don’t mind:
3 yrs ago, at the advice of her financial planner, an investor purchased a $1000 face, 4.5%, semiannual coupon bond with 7 yrs to maturity priced to yield 6.5% for $888.94. The reinvestment income that must be generated over the life of the bond to realize a yield of 6.5% is closest to:
A. $72
B. $76
C. $80
D. $83
Thanks for the help!

anshultongia

ans B 76$
Method:
What investment in the bond would earn at the end of the 7 year period.
888.94 * (1.0325)^14 = 1391.02
What is actually obtained?
1000 Face + 22.5 * 14 (Coupons) = 1315
So amount to be reinvested = 1391.02  1315 = 76$

yuoska

Awesome, thank you for answering so quickly