An investor purchases a nine-year, 5% annual coupon payment bond at a price equal to par value. After the bond is purchased and before the first coupon is received, interest rates increase to 7%. The investor sells the bond after six years. Assume that interest rates remain unchanged at 7% over the six-year holding period.

1. Per $100 of par value, what is the sum of the future value of the reinvested coupon payments at the end of the holding period?

2. What is the capital gain/loss per $100 of par value resulting from the sale of the bond at the end of the six-year holding period?

3. Assuming that all coupons are reinvested over the holding period, what is the investor’s six-year horizon yield (%)?

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