Question

As an investment manager of Southern Cross fund, you have $5 million in capital to purchase debt securities; $3 million for money market securities and $2 million for bonds. Having finished your money market purchases, you move on to buying bonds. Telstra is selling 5 year bonds at a face value of $1,000,000 which pay a semi-annual coupon of 6% p.a. You require a yield-to-maturity (YTM) of 7% pa. on Telstra's bonds, what price are you willing to pay for each Telstra bond? fenter your answer without S or, to 2 decimai places) Answer: How many Telstra bonds can you buy? Answer: 2 years have passed and you decide to sell the bonds on the secondary market Another investment fund. Eastern Cross Securities, wishes to buy your bonds and they have a YTM of 5% pa What is the price that they will pay? hint: ND the vaiues ferv substitution into the bond feua. FV Face Vakue, it does nor change. y-uyer's yield, this has changed.Cfixed and does not change from befove n number of payments remaining. The bonds originally had 5 years to matwity You have held them for 2 years. How many semi annua payments remain? enter your ans wer without Sex,to 2 decimai piaces Answer Consider the price you bought the bonds at and compare this to the price that Eastern Cross is offering to pay for them. Is it worthwhile to sell the bonds? Yes Why? A capital gain will be made

Answer 1

1: Using financial calculator

Input:

N = 5*2 = 10

Fv = 1000000

PMT = 6%*1000000/2 = 30000

I/Y = 7/2 = 3.5

Solve for PV as -958416.97

Price of the bond = $ 958416.97

2: Number of bonds that can be purchased = 2000000/958416.97 = 2.09

Rounded off to 2 bonds

3: Using financial calculator

Input:

N = (5-2)*2 = 6

Fv = 1000000

PMT = 6%*1000000/2 = 30000

I/Y = 5/2 = 2.5

Solve for PV as -1027540.63

Price of the bond $ 1027540.63

4: Yes.

Since there is a capital gain due to increase in price.