Question

QUESTION ONE A 91 days treasury bill with a par value of K100 has been issued at a price of K97.55. Required: (a) Calculate the bond equivalent yield of the Treasury bill. (b) If the Treasury bill above was a 182 instrument, would the bond equivalent yield be more than or less than the bond equivalent yield calculated above? A 273 Treasury bill with a par value of K100.00 has a bond equivalent yield of 12.75%, which would be achieved if by the current Treasury bill holder if it was held until maturity. Required: Calculate the issue price of the Treasury bill [TOTAL: 2 MARKS] A company has in issue a 5% Bond that is currently trading at $97.75 per $100.00 nominal. The bond is redeemable at its par value of $100.00 in five years' time and coupon payments are made annually The company plans to issue another bond with a coupon rate of 4%, but with the same yield to maturity as the current bond. The proposed bond will have a maturity period of five years and its coupon payments will be made annually. The bond will be redeemed at its par value of $100.00 in five years' time. Required: (a) Calculate the foilowing for the current bond: 0 Current yield (1) Simple yield to maturity (lt) Yleld to maturity (gross redemption yield) [6 Marks) (b) Calculate the issue price of the proposed bond issue and calculate its current yield and simple yield to maturity. [4 marks]

Answer 1

A (a) price price = K97.55

face value = K100

duration, n=91 days

yield = [(face value - price)/ price] * (365/n)

= ((100-97.55)/97.55)*(365/91)

= 0.100737 =10.07%

(b) when duration is n =182 days

= ((100-97.55)/97.55)*(365/182)

= 0.0504 = 5.04%

If year to maturity increases bond yield will come down.

c) yield = [(face value - price)/ price] * (365/n)

12.75% = ((100 - price) / price)) * (365/ 273)

.1275 =  ((100 - price) / price)) * 1.336996

(100 - price) / price) = .09536

100 - Price = .09536 Price

1.09536 Price = 100

Price = 91.294