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solution

An investor is considering the purchase of a 20-year 7% coupon bond selling for RM816 and a par value of RM1,000. The yield to maturity for this bond is 9%.

(i) Calculate the total future dollars if this investor invested RM816 for 20 years earning 9% compounded semiannually.

(ii) Find the total coupon payments over the life of this bond and the total future dollars from the coupon payments and the repayment of principal at the end of 20 years.

(iii) For the bond to produce the same total future dollars as in part a (i), find how much must the interest on interest be.

(iv) Calculate the interest on interest from the bond assuming that the semiannual coupon payments can be reinvested at 4.5% every six months and demonstrate that the resulting amount is the same as in part (iii).

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