3a) Given: face value = 100
Present value = 104.4062
Time = 20 years
Coupon rate = 10%
Coupon = 10% of face value
= 10% * 100 = 10
Using financial calculator
Inputs: N =20
Fv = 100
Pv = 104.4062
Pmt = 10
I/y (ytm) =compute
We get I/Y or ytm = 9.5%
3b) If ytm is equal to 10% , which is same as that of the coupon rate then the present value of bond will be be equal to its face value. It is shown below
Given : Ytm = 10%
Face value = 100
Time = 20 years
Coupon = 10
Using financial calculator,
Inputs : i/y =10%
Pmt =10
Fv = 100
N = 20
Pv = compute
We get, PV or fair value = 100
3c) if the yield drops to 5% then the investor will not only earn yield but also benefit from capital appreciation because there is an inverse relationship between price of the bond and yield. It is a good sign as we hold the bond and the price goes up. So if we sell the bond we get a high price .
FV = 100 3. (10 marks) An ABC bond has 20 years till maturity, a coupon...
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