An individual is planning to purchase 100,000 nominal of a bond on 1 June 2016 which...

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An individual is planning to purchase £100,000 nominal of a bond on 1 June 2016 which will be redeemable at 110% on 1 June 2020. The bond will pay coupons of 3% per annum at the end of each year. The individual wishes to invest the coupon payments on deposit until the bond is redeemed. It is assumed that, in any year, there is a 55% probability that the rate of interest will be 6% per annum effective and a 45% probability that it will be 5.5% per annum effective. It is also assumed that the rate of interest in any one year is independent of that in any other year. (i) Derive the necessary formula to determine the mean value of the total accumulated investment on 1 June 2020. [4] Calculate the mean value of the total accumulated investment on 1 June 2020 [2] [Total 6] In January 2014, the government of a country issued an index-linked bond with a term of two years. Coupons were payable half-yearly in arrear, and the annual nominal coupon rate was 6%. The redemption value, before indexing, was £100 per £100 nominal. Interest and capital payments were indexed by reference to the value of an inflation index with a time lag of six months. 3 A tax-exempt investor purchased £100,000 nominal at issue and held it to redemption. The issue price was £97 per £100 nominal. The inflation index was as follows: Date July 2013 January 2014 July 2014 January 2015 July 2015 January 2016 Inflation Index 120.0 122.3 124.9 127.2 129.1 131.8 Set out a schedule of the investor's cashflows, showing the amount and month of each cashflow. [31 Determine the annual effective real yield obtained by the investor to the nearest 0.1% per annum. [5] [Total 8] An individual is planning to purchase £100,000 nominal of a bond on 1 June 2016 which will be redeemable at 110% on 1 June 2020. The bond will pay coupons of 3% per annum at the end of each year. The individual wishes to invest the coupon payments on deposit until the bond is redeemed. It is assumed that, in any year, there is a 55% probability that the rate of interest will be 6% per annum effective and a 45% probability that it will be 5.5% per annum effective. It is also assumed that the rate of interest in any one year is independent of that in any other year. (i) Derive the necessary formula to determine the mean value of the total accumulated investment on 1 June 2020. [4] Calculate the mean value of the total accumulated investment on 1 June 2020 [2] [Total 6] In January 2014, the government of a country issued an index-linked bond with a term of two years. Coupons were payable half-yearly in arrear, and the annual nominal coupon rate was 6%. The redemption value, before indexing, was £100 per £100 nominal. Interest and capital payments were indexed by reference to the value of an inflation index with a time lag of six months. 3 A tax-exempt investor purchased £100,000 nominal at issue and held it to redemption. The issue price was £97 per £100 nominal. The inflation index was as follows: Date July 2013 January 2014 July 2014 January 2015 July 2015 January 2016 Inflation Index 120.0 122.3 124.9 127.2 129.1 131.8 Set out a schedule of the investor's cashflows, showing the amount and month of each cashflow. [31 Determine the annual effective real yield obtained by the investor to the nearest 0.1% per annum. [5] [Total 8]

Answer rating: 100% (QA)

1 Formula for Mean Value of Total Accumulated Investment on 1 June 2020 Let C Annual coupon payment ... View the full answer