Question

Question 1 (14 Marks) BRADLE THOMAS is considering investing in either of two outstanding bonds. The bonds both have $1.000 par values and 11% coupon interest rates and pay annual interest. Bond A has exactly 5 years to maturity, and bond Bhas 15 years to maturity. 4.1. Calculate the value of bond Nifthe required return is (a) (8 %.(b) 11%, and (c) 14% (6 Marks) 4.2. Calculate the value of bond if the required return is (a) 8%. (b) 11%, and (c) 14% (6 Marks) 4.3. From your findings in parts 4.1 and 4.2 and discuss the relationship between time to maturity and changing required returns.. (2 Marks) (6 Question 5 (16 Marks) Elliakim Enterprises bonds currently sell for $1.150, have an 1196 coupon interest rate and a $1,000 par value, pay interest annually, and have 18 years to maturity 5.1. Calculate the bonds' current yield. (54Maris) 5.2. Calculate the bonds yield to maturity (YTM). 3 Marks) 5.3. Compare the YTM calculated in part a to the bonds coupon interest rate and use a comparison of the bonds current price and their par value to explain this difference S.A. As a risk-averse investor, would you prefer bonds with short or long periods un maturity? Why? 3 Marles) (Marks)

Answer 1

4.1

a
=1000*11%/8%*(1-1/1.08^5)+1000/1.08^5=1119.78130111234

b
=1000*11%/11%*(1-1/1.11^5)+1000/1.11^5=1000

c
=1000*11%/14%*(1-1/1.14^5)+1000/1.14^5=897.007570934246

4.2

a
=1000*11%/8%*(1-1/1.08^15)+1000/1.08^15=1256.78436063779

b
=1000*11%/11%*(1-1/1.11^15)+1000/1.11^15=1000

c
=1000*11%/14%*(1-1/1.14^15)+1000/1.14^15=815.734960443391

4.3
Higher maturity has higher impact from change in required returns