Question

WORTH 1 MARK 1. A corporation bond has the face value of $1,000, the coupon rate of 6% per annum and the remaining term-to-maturity of 10 years. Coupon interest on the bond will be paid semi- annually. The current yield-to-maturity of the bond is 5% per annum. Find the current price of the bond. Secondly, assume that the investor will buy this bond today and will hold the bond for the next 6 months. At the end of the next 6 months, the price of the bond is expected to be $1,100. Find the 6-month rate of return the investor is expected to earn.

Answer 1

1. The PV of the bond is :

FV = $1000

PMT = $30 ( compounded semi -annually)

N = 20 Years ( compounded semi -annually)

I/Y = 10% ( compounded semi -annually)

So, the present value of the bond is : $404.0505

The coupon paid is $30, The market price is $1100. So, the rate of return is :

= {($1,100 - $404.0505 + $30) / $404.0505} * 100

= 179.67%