Answer:
d. 101
Explanation:
first we must determine the amount of the loan:
PV of face value = $1,000 / (1 + 3%)²⁰ = $553.68
PV of coupon payments = $40 x 14.877 (PV annuity factor, 3%, 20 periods) = $595.08
Loan amount = $1,148.76
Future value of the loan = $1,148.76 x (1 + 5%)¹⁰ = $1,871.21
You will receive 20 coupon payments of $40 each, which will be reinvested at 2% semiannual rate. You will also receive $1,000 corresponding to the face value of the bond.
Future value of the coupon payments = $40 x 24.297 (FV annuity factor, 2%, 20 periods)] = $971.88
Total money received at the end of the 10 year period = $971.88 + $1,000 = $1,971.88
Gain = $1,971.88 - $1,871.21 = $100.67 ≈ $101
