# Bonds

**Topics:**Rate of return, Interest, Time value of money

**Pages:**4 (517 words)

**Published:**January 1, 2013

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% +7%)/3...

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