Phuc has just purchased a bond issued by the US government. The bond has a face...

 

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Phuc has just purchased a bond issued by the US government. The bond has a face value of $100,000 which will mature in 15 years' time. That is, he will receive $100,000 on presenting this bond to the Government Treasury in 15 years' time. In the meantime, possession of the bond results in him receiving regular coupon payments of $4,000 every six months over the next 15 years (30 payments in total). The first coupon payment will be made 6 months after the purchase of the bond. Having learned corporate finance at UNSW, he remembers the lecturer say that "the price of a bond is the present value of its future coupon payments and face value, at the current market interest rate". Note: Round your answers to 2 decimal places unless stated otherwise. Do NOT write $, % and ignore commas in expressions like 10,000 etc... a) If the prevailing market interest rate for the whole period is 10% per annum, compounded semi-annually, what is the purchase price of this government bond? [3 marks] b) Assume that Phuc plans to hold the bond until maturity and further assume that he will put all the coupon payments received in a savings account that pays 6% per annum, compounding semi-annually. How much will he have in his savings account in 15 years' time? Note: do NOT take into account the face value in your calculation. [3 marks] c) Suppose that Phuc paid $100,000 for the bond and he follows his savings plan in part b), what is the annually compounded interest rate that he would earn on his investment? [3 marks] d) In addition to the US government bond, Phuc also wants to buy 100 perpetual bonds. A perpetual bond pays fixed coupons indefinitely and there is no maturity nor payment of face value. Each perpetual bond pays coupons of $5 every six months indefinitely, where the first coupon payment starts a year from now. Assume that the current market interest rate is 5% per annum, compounded semi-annually, how much would Phuc need to pay for these perpetual bonds in total? [3 marks] Phuc has just purchased a bond issued by the US government. The bond has a face value of $100,000 which will mature in 15 years' time. That is, he will receive $100,000 on presenting this bond to the Government Treasury in 15 years' time. In the meantime, possession of the bond results in him receiving regular coupon payments of $4,000 every six months over the next 15 years (30 payments in total). The first coupon payment will be made 6 months after the purchase of the bond. Having learned corporate finance at UNSW, he remembers the lecturer say that "the price of a bond is the present value of its future coupon payments and face value, at the current market interest rate". Note: Round your answers to 2 decimal places unless stated otherwise. Do NOT write $, % and ignore commas in expressions like 10,000 etc... a) If the prevailing market interest rate for the whole period is 10% per annum, compounded semi-annually, what is the purchase price of this government bond? [3 marks] b) Assume that Phuc plans to hold the bond until maturity and further assume that he will put all the coupon payments received in a savings account that pays 6% per annum, compounding semi-annually. How much will he have in his savings account in 15 years' time? Note: do NOT take into account the face value in your calculation. [3 marks] c) Suppose that Phuc paid $100,000 for the bond and he follows his savings plan in part b), what is the annually compounded interest rate that he would earn on his investment? [3 marks] d) In addition to the US government bond, Phuc also wants to buy 100 perpetual bonds. A perpetual bond pays fixed coupons indefinitely and there is no maturity nor payment of face value. Each perpetual bond pays coupons of $5 every six months indefinitely, where the first coupon payment starts a year from now. Assume that the current market interest rate is 5% per annum, compounded semi-annually, how much would Phuc need to pay for these perpetual bonds in total? [3 marks]

Answer rating: 100% (QA)

Phucs Bond Investment Analysis a Purchase Price of Bond Face value100000 Coupon payment4000 per seme... View the full answer