Question

where wxyz =3351

A bond with face value of KD WXYZ is purchased for KD WXYZ*0.8. The bond payments are made on semi-annual basis with an coupon rate of (W+X+Y+Z)/3%. The bond matures in 8 years. a) Draw cash flow diagram of the bond. b) Calculate the bond current yield c) Calculate yield to maturity interest rate. (Show all calculation with trial and error) d) If after 3 years you want to sell the bond, what will b the best price to sell the bond

Answer 1

a) Coupon rate= (3+3+5+1)/3 or 4%

Coupon payment amount=3351*4%=134.04

Purchase price=3351*0.8=2680.8

8th year cash inflow=3351+134.04=3485.04

t=0	t=1	t=2	t=3	t=4	t=5	t=6	t=7	t=8
-2680.8	134.04	134.04	134.04	134.04	134.04	134.04	134.04	3485.04

b)

Current yield of the =coupon payment/purchase price=134.04/2680.8=5%

c) To calculate yield to maturity: PMT=134.04, PV=-2680.8, FV=3351, nper=8, rate=?

R T U V 134.04 PMT nper PV -2680.8 FV 3351 | =RATE (S2,S1,S3,S4,0) rate RATE(nper, pmt, pv, [fv], [type], [guess])

R S PMT 134.04 nper -2680.8 PV FV 3351 7.40% rate

Hence, yield to maturity is 7.4%

d) After 3 year, PMT=134.04, FV=3351, nper=8-3=5, PV=?

W Y nper 7.40% rate 134.04 PMT FV 3351 =PV(W2,W1,W3,W4,0) PV(rate, nper, pmt, [fv], [type]) PV X

W V 5 nper 7.40% rate PMT 134.04 FV 3351 ($2,888.60) PV

Hence, the best price of the bond after 3 year would be $2888.60