Question 7 A government issued a number of index-linked bonds on 1st September 2017 which were...

 

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Question 7 A government issued a number of index-linked bonds on 1st September 2017 which were redeemed on 1st September 2019. Each bond had a nominal coupon rate of 4% per annum, payable half-yearly in arrears, and a nominal redemption price of 115%. The actual coupon and redemption payments were indexed by reference to the value of the retail price index with a time lag of 6 months. The values of the retail price index during the relevant years were: March September March September 2017 2017 2018 2018 130 133.8 137.8 140.4 Date RPI March 2019 143 September 2019 146.9 An investor purchased £5,000 nominal at the issue date, and held it until it was redeemed. The issue price was £110 per £100 nominal. (i) Calculate all the investor's cash flows from the bond and state the date when each occurs. [10 marks] (ii) Hence, or otherwise, calculate the gross annual effective yield achieved by the investor on this investment. [6 marks] Question 7 A government issued a number of index-linked bonds on 1st September 2017 which were redeemed on 1st September 2019. Each bond had a nominal coupon rate of 4% per annum, payable half-yearly in arrears, and a nominal redemption price of 115%. The actual coupon and redemption payments were indexed by reference to the value of the retail price index with a time lag of 6 months. The values of the retail price index during the relevant years were: March September March September 2017 2017 2018 2018 130 133.8 137.8 140.4 Date RPI March 2019 143 September 2019 146.9 An investor purchased £5,000 nominal at the issue date, and held it until it was redeemed. The issue price was £110 per £100 nominal. (i) Calculate all the investor's cash flows from the bond and state the date when each occurs. [10 marks] (ii) Hence, or otherwise, calculate the gross annual effective yield achieved by the investor on this investment. [6 marks]

Answer rating: 100% (QA)

First lets calculate the total cash flows from the bond Coupon payment at March 2018 004 500 1404 ... View the full answer