Question

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)

Answer 1

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%