Bonds

NAME: MASSAWE BARAKA, REG. NO: 2010-04-03894.

12
FINANCE 202 INDIVIDUAL ASSIGNMENT
UDBS

Consider a 10 year bond that has a face value shs 1000, a coupon rate of 6% and pays interest once a year.
(a)Suppose person A bought this bond at par when it was initially issued and sold it 1 year later to person B for shs 1024.What is B’s total return?
Soln
Total return =[ Interest paid +(selling price – buying price)]/buying price
  Given; Annual interest paid = coupon rate x par value, coupon rate = 6%, par value =1000.
                                      = 6% x1000
                                  =60 , buying price = 1000,   selling price = 1030
,                  
                                      = [60 + (1030 – 1000 )]/1000
                                      =0.09 or 9%
(b)Suppose B holds the bond for 1 year and sells it to person C for shs 1024.What is B’s total return?
Soln
Given; annual interest paid = 60, buying price = 1030, selling price = 1024
                                                  =[60 + (1024 – 1030)]/1030
                                                  =0.052 or 5.2%
(c)Assume C holds the bond for 3years.Suppose that at the end of these 3 years market interest rate for bonds similar to this one is 7%
i)What price should C expect to fetch in the market?
VB =INT(1 -1/(1 + rd)n /rd )   + m/(1 +rd )n

Given; INT = 60, rd =7%, n = 5, M = 1000.
         
            = 60(4.1) + 713
           
            =246 + 713

            =959.

ii)Suppose C sells the bond to D at the expected market price. Compute C’s total rate of return (HPR) for
the 3 year period and the average(simple & geometric) annual return.

Soln
      =[INT + (p1 –p0)]/p0

Given;INT = 60, p1 = 959, p0 = 1024

                =[60 +(959 – 1024)]/1024

      HPR   = -0.0049 or -0..49%

Simple average annual return

                =(%return + %return +……)/no of years
               
                = (7% +7%... [continues]

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