Three investors invest in the same 10-year 8% annual coupon bond. They bought the bond at the same price ($85.503075 for a par value of $100) and at the same time. A is a buy-and-hold investor (hold till maturity), B will sell the bond after four years, and C will sell the bond after seven years.
(A)
Bond | |||
Settlement date | 30-Mar-20 | ||
Maturity date | 30-Mar-30 | ||
Coupon | 8% | ||
Price | 85.50308 | ||
Redemption | 100 | ||
Frequency | 1 | ||
Yield | 10.40% | ||
=YIELD(B2,B3,B4,B5,B6,1) |
Yield to maturity is 10.4%
(B)
Cash flow for A = coupon + face value = 8%*100 +100 = 8 + 100 = 108
When B sell the bond, the bond will have remaining maturity of 6 years
Bond | |||
Settlement date | 30-Mar-24 | ||
Maturity date | 30-Mar-30 | ||
Coupon | 8% | ||
Yield | 10.40% | ||
Redemption | 100 | ||
Frequency | 1 | ||
Price | 89.66877 | ||
=PRICE(B2,B3,B4,B5,B6,1) |
B cash flow = 89.66877
When C sell the bond, the bond will have a remaining maturity of 3 years
Bond | |||
Settlement date | 30-Mar-27 | ||
Maturity date | 30-Mar-30 | ||
Coupon | 8% | ||
Yield | 10.40% | ||
Redemption | 100 | ||
Frequency | 1 | ||
Price | 94.07334 | ||
=PRICE(B2,B3,B4,B5,B6,1) |
C cash flow = 94.07334
(C) After the bond is purchased and before the first coupon is received, which means the time to maturity remains is 9 years & yield becomes 11.4%
Bond | |||
Settlement date | 30-Mar-21 | ||
Maturity date | 30-Mar-30 | ||
Coupon | 8% | ||
Yield | 11.40% | ||
Redemption | 100 | ||
Frequency | 1 | ||
Price | 81.46319 | ||
=PRICE(B2,B3,B4,B5,B6,1) |
In such a case, the price of the bond becomes 81.46319 while they had purchased it at 85.503075
Three investors invest in the same 10-year 8% annual coupon bond. They bought the bond at...
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