Question 2: (15 marks) Fin were sold at par ($1,000), have a 12 2025. Coupon pay

Question

Question 2: (15 marks) Fin were sold at par ($1,000), have a 12 2025. Coupon payments are made annually. ancial Institution “ZEUS', issued a new series of bonds on January 1, 2013 The bonds % coupon, and mature in 12 years, on December 31, 1. What was the ongoing rate of interest i on January 1, 2013? What the YTM of 2. What was the price of the bond on January 1, 2018, 5 years later, assuming that 3. Find the CY and the CGY on the bond on January 1, 2018, given the price of the 4. On January 1, 2023, Zeus' bond sold for $916.42. What was the YTM at that 5. What were the CY and the CGY on January 1, 2023? Zeus' bond on January 1, 2013 will be? the level of interest rates had fallen to 10 percent? bond as determined in part 2 above? date?

Explanation / Answer

Question2:

1. Since the Bond i sold at par on January 1, 2013 the YTM and the Coupon rate will be the same. Hence the YTM will be 12%, which is the coupon rate.

2. The price of the bond on January 1, 2018 (i.e five years later), is the present value of future cashflows.
The period from January 1, 2018 until December 31, 2025, (i.e. the date of maturity of the series of bonds) is
8 years. That is 8 periods.

Present Value of Interest Payments = c × F × 1 (1 + r)-t+Fr(1 + r)t

r is the interest rate prevailing in the market, c is the coupon rate on the bond, t is the time periods occurring over the term of the bond and F is the face value of the bond,

= 120 * (1- (1/1(1.1)8))/0.1 + 1000/1.18

= 1026.316 is the price of the bond

3. The current yield is the annual coupon payment divided to the price and therefore:

Current yield = 120 / 1,026.316 = 0.116923026 = 11.69%

The capital gains yield is the total yield minus the current yield, i.e. 10% - 11.69% = -1.69%

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