) FOR THE EXAMPLE GIVEN IN SPONG'S STATEMENT 3, THE ONE-YEAR EXPECTED TOTAL RETURN IS CLOSEST TO

4.) For the example given in Spong's Statement 3, the one-year expected total return is

closest to:

A.

4.35%.

B.

4.50%.

C.

4.84%.

Answer = A

The first step is to calculate the total coupon payments plus reinvestment income. Two

coupon payments are received, one of which is reinvested at one-half the annual

reinvestment rate, so: Income flow = $2.50 + ($2.50 × 1.01) = $5.025.

The second step is to determine the horizon price that is given in Statement 3: $102.50

The third step is to add the income flow and horizon price together to equal horizon

future dollars: $5.025 + $102.5 = $107.525

The fourth step is to calculate the semiannual total return by dividing the total future

dollars by the beginning price: ($107.525/$103)

^0.5

– 1.0 = 0.02173, or 2.173%

The final step is to double the semiannual total return to get the total return: