Question

Description You are an internal auditor in a fund management company. You have been asked to verify the valuation of three bonds picked from a fund's portfolio as of close of business on 31 December 2015 Bond A Face value Coupon Repayment Bullet at maturity Maturity Yield: $5,000,000 3.50% pa. payable semiannually 31 December 2020 The yield required by investors for a 5-year bond rated A+ by Standard & Poors and A1 by Moody's is 2.25% (semi-annual compounding) Bond B Face value Coupon Maturity Yield $4,000,000 Zero 31 December 2025 The yield required by investors for a 10-year bond rated AA- by Standard & Poors and Aa3 by Moody's is 5.25% (continuous compounding) Instructions Use a bond price calculator such as the rate function in Excel to calculate the value of the three bonds. Give brief details of how you calculated each answer What is the value of Bond A on 31 December 2015? What about the duration of Bond A? 2. What is the value of Bond B on 31 December 2015 What is the value of Bond A on 31 December 2015? What about the duration of Bond A? Responses What is the value of Bond B on 31 December 2015?

How to do these questions. Thanks

Answer 1

1). Part A
Face value	5000000
Coupon	3.50%	(Semi-Annually)
Coupon Amount	Face Value X Coupon	175000
Repayment	31-Dec, 2020
Time	5 Years
Period	5*2 = 10 Intervals
Yield	2.25% Semi Annually
Bond Value	Present Value of Face Value + Present Value of Coupons
Bond Value =	175000*PVAF(2.25%, 10) + 5000000*PVF(2.25%, 10)
	1551587.86 + 4002551
Bond Value =	$5,554,138.86

Part B	Bond Duration
Period	Cash Flow	Period * Cash Flow	PVF*2.25%	PV of Cash Flow
1	175000	175000	0.9780	171149.1
2	175000	350000	0.9565	334766.1
3	175000	525000	0.9354	491099.3
4	175000	700000	0.9148	640390.3
5	175000	875000	0.8947	782873.3
6	175000	1050000	0.8750	918775.5
7	175000	1225000	0.8558	1048317.6
8	175000	1400000	0.8369	1171713.7
9	175000	1575000	0.8185	1289171.5
10	5175000	51750000	0.8005	41426399.3
		Total Weighted Amount		$48,274,655.8
Duration = Total Weighted amount/Price of the bond
Duration	8.69

	Part C	Value of Bond B
	Face value	4000000
	Coupon	Zero
	Repayment	31-Dec, 2025
	Time	10 Years
	Yield	Continuous Compounding
	Bond Value=Amount*(e^(rt))
		4000000*(e^(0.0.275*10))
	Bond Value	$5,266,120.00