You are considering purchasing the following bond: Face Value:1,000,000 SEK Coupon rate:5.0 % (coupons are paid once
Question:
You are considering purchasing the following bond:
Face Value:1,000,000 SEK
Coupon rate:5.0 % (coupons are paid once per year)
Time to maturity: 30 years
The yield to maturity of the bond is 6 %
a) What is the price of the bond today?
b) For the same bond in item a, assume that we wish to sell it in 10 years' time after the coupon has just been paid and that the yield to maturity has dropped to 5 % by then. What price do we receive when we sell the bond?
c) Use the table in the answer sheet and indicate the cash flows received from an investment consisting in buying the bond 30 years before its maturity, keeping it for 10 years and selling it right after coupon number 10 is paid (the investment in year 0, the coupon payments and the payment received when we sold the bond at the price computed in item b). Use the values actually paid out those years, not the present value. Also, indicate by using the sign + or -if it was a cash outflow or a cash inflow).
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | |
| Investment | |||||||||||
| Coupon payment | |||||||||||
| Selling price |
Expert Answer:
Basic Finance An Introduction to Financial Institutions Investments and Management
ISBN: 978-1111820633
10th edition
Authors: Herbert B. Mayo
