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Class 11 Completed

1 01 1 40 10 fv 1 10 40 1 1 r and n c with r r c

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1 ) 01 . 0 1 ( 40 10 = + = + ⎥ ⎦ ⎤ ⎢ ⎣ ⎡ + = FV % 1 , 10 , 40 1 ) 1 ( * ) ( = = = ⎥ ⎦ ⎤ ⎢ ⎣ ⎡ + = r and n C with r r C Coupons FV n
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19 Example: ROR on Bond Investment (3) K New Timeline: 0 1 2 3 4 5 Years ----|----------|----------|----------|----------|----------|----- $ 852.80 $1,418.49 K Since the ROR is an effective annual rate, we can rewrite the timeline in terms of years once we calculated the FV of all cash flows. K This ROR is lower than the ytm because the coupons are reinvested at an annual rate of 2% compounded semi-annually, which is lower than the ytm. % 71 . 10 4885 . 418 , 1 ) 1 ( 80 . 852 ) 1 ( * 5 = = + = + ROR ROR FV ROR PV n
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