Problem:
Your boss has again asked for your help. He needs to figure out the holding period yield on a candidate bond for inclusion in a pension bond portfolio and whether your company should purchase it. He has left a note on your desk:
We are considering purchasing a 7% percent coupon bond (coupons paid semiannually) with 14 years remaining to maturity for 104-25 (priced in 32nds). We can re-invest the coupon payments at 4% percent, and we expect to sell the bond after a 3-year holding period for 105-13 (priced in 32nds).
Provide:
1. The future value of the annuity from the re-invested coupons.
2. The holding period yield for the 3-year investment horizon.
3. Your recommendation as to whether the company should purchase the candidate bond if your required return is 6%.