INSTRUMENT Treasury Bonds ______________________________________________________

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 _________________________________________________________________________

Is this bond trading at par, at a premium or at a discount? What condition gives rise to this pricing relationship? Based on this pricing relationship, what can you infer about the risk of an investment in these bonds since they were first issued?

Explanation / Answer

Nothing mention regarding interest rate than it is being assumed that YTM is equal to coupon rate,

Therefore Bond is trading at par.

Condition gives rise to this pricing relationship :

If YTM falls than the price of bond would rise as they are having inverse relationship.

Inference about the risk of an investment in these bonds since they were first issued :

Currency Risk

Maturity Risk

Inflation risk

and Interest Yield risk

Note :

If YTM is equal to Coupon than the Bond is trading at par

If YTM is greater than Coupon than the Bond is trading at discount

If YTM is lower than Coupon than the Bond is trading at premium

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.