8. If investors holding our 4—year bonds (Bond #1) receive interest income annually for four years, plus the face value of the bonds at maturity, a. What will be the total interest earned on the bond over the next four years?

b. What will be the face value received at maturity? Given the following projected income stream for Bond #1: Coupon Face Prueched Reinvestment Rates

Year Interest (3) Value (5) 10% 5%

1 100

2 100 10.00 5.00

3 100 21.00 10.25

4 100 m M 15.76

Total

'ncome

in year 4 499. 10m. mo. 1 5.76 What is the total cash available over the next four years to the bondholder earning 10%? What is the total cash available over the next four years to the bondholder earning 15%? What is the average annual rate of return for the bondholder earning 10%? (Hint: Use the market price of 930.50.)

What is the average annual rate of return for the bondholder earning 15%? (Hint: Use the market price of 930.50.)

Why does the reinvestment rate affect the annual rate of return for the same bond? If the expected rate of return on our bonds is 10%, what is the duration of Bond #1? F‘PrnEDP-f‘ 9. What is the yield to maturity on the Treasury Bills (a discount bond)? 10. What is the real rate of interest if the nominal rate is 10% and the inﬂation rate is 3%?