Ann has bought BigBank bonds as an investment. She purchased the bonds on 31 December 2012 (just after the semi-annual coupon payment due on that date had been paid), for a yield to maturity of 5% p.a. The bonds have a face value of $1000, a coupon rate of 4% p.a., a maturity date of 31 December 2030, and pay coupons twice a year.
a. What price (per bond) did Ann pay for these bonds on 31 December 2012?
b. Ann sells the bonds on 31 December 2017 (immediately after receiving a coupon payment) at a yield to maturity of 4.5%p.a. What price (per bond) does Ann receive?
c. Draw a timeline of all the cash flows Ann received during the time she held the BigBank Bonds. (4 marks)
d. Did Ann earn more than 5%p.a. over her holding period, or less than 5% p.a.? Explain why. (4 marks)
a. FV = 1000, PMT = 20, N = 36, rate = 2.5%
use PV function in Excel
price = 882.2187
b. FV = 1000, PMT = 20, N = 26, rate = 2.25%
use PV function in Excel
price = 977.8345
c
Cash flows | Year |
(882.219) | 0 |
20.000 | 1 |
20.000 | 2 |
20.000 | 3 |
20.000 | 4 |
20.000 | 5 |
20.000 | 6 |
20.000 | 7 |
20.000 | 8 |
20.000 | 9 |
997.835 | 10 |
d. Use iRR function in Excel for the above and multiply by 2
rate of interest earned = 6.41%
Ann has bought BigBank bonds as an investment. She purchased the bonds on 31 December 2012...
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