INSTRUMENT Treasury Bonds ______________________________________________________
ID: 2748988 • Letter: I
Question
INSTRUMENT Treasury Bonds _________________________________________________________________________
CURRENCY Australian dollars _________________________________________________________________________
MATURITY DATE 21 October 2018 _________________________________________________________________________
COUPON 3.25% per annum, paid semi-annually in arrears, on the Face Value of the bonds _________________________________________________________________________
REDEMPTION: Par
_________________________________________________________________________
COUPON PAYMENT DATES 21 April and 21 October in each year commencing on 21 April 2014, to and including the Maturity Date _________________________________________________________________________
DENOMINATION $1,000 Face Value _________________________________________________________________________
Based on current market prices for this bond, it is possible to infer that investors require a return of 3% per annum, compounding semi-annually, on investments of this risk. Assuming this required rate of return remains constant through to the bond’s maturity date, how much do you expect this bond to trade for on 21 October 2014, immediately after the coupon interest has been paid to the holder of the bond?
Explanation / Answer
Face value (FV) $ 1,000 Coupon rate 3.25% Number of compounding periods per year 2 Interest per period (PMT) $ 16.25 Number of years to maturity 4 Number of compounding periods till maturity (NPER) 8 Market rate of return/Required rate of return 3.00% Market rate of return/Required rate of return per period (RATE) 1.50% Bond price PV(RATE,NPER,PMT,FV)*-1 Bond price $ 1,009
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