. 1. An investor purchases a 1; 000 bond redeemable at par that pays 8% semiannu

ID: 2697318 • Letter: #

Question

.1. An investor purchases a 1; 000 bond redeemable at par that pays 8% semiannual coupons and

matures in 10 years. The bond will yield 7% convertible semi-annually to maturity. If the bond

is sold in 5 years, the minimum sale price the investor needs to receive in order to realize the

same yield is X

2. A bond with a face value of 100; 000 has coupons of 3% per annum payable semi-annually. It

will be redeemed at par. It is purchased for a price of 91,825. At this price the yield to maturity

is 4% per annum convertible semi-annually.

Calculate the term of the bond.

Bond Maturity = FV = 1000

Coupon 8% semi. So PMT = 8%*1000/2 = 40

nper = 10Yr*2 = 20 periods

Rate = 7%/2 = 3.5%

First we fnd current Bond price

So Bond price = PV(rate,nper,PMT,FV)

= PV(3.5%,20,40,1000) = $1,071.06

If bond is sold in 5 yrs, nper = 5*2=10.

Current price = PV=$1,071.06

Rate = 3.5%, PMT=40

So Sale price at Y5 = FV(Rate,nper,PMT,PV)

= FV(3.5%,10,-40,1071.06) = $1,041.58

So Sale price at end of 5 yrs will be $1,041.58...Ans(1)

2. Bond Face value = FV=100,000

Current price = PV=91825

Coupon 3% semi. So PMT = 3%*100000/2= 1500

YTM = Rate = 4%/2 = 2%

So Term of bond = nper(Rate,pmt,pv,fv)

= nper(2%,1500,-91825,100000)

= 20 period

As it is semianuual bond, Term = nper/2 = 10 Yrs..Ans(2)

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