question archive 4  Required rose of retom on a bond [LO 4) A 10 per cent $100 government bond that pays interest annually, and currently is 5 years from maturity, is selling for $103

4  Required rose of retom on a bond [LO 4) A 10 per cent $100 government bond that pays interest annually, and currently is 5 years from maturity, is selling for $103

Subject:AccountingPrice: Bought3

4  Required rose of retom on a bond [LO 4)

A 10 per cent $100 government bond that pays interest annually, and currently is 5 years from maturity, is selling for $103.29. What is the required rate of return (yield) on this bond? What is the implied real interest rate in the expected inflation rate is 5 per cent per annum?

5 Valuation of bonds (LO 4)

A 12 per cent $100 government bond pays coupon interest twice yearly and matures in 5 years' time. The current market yield on the bond is 10 per cent per annum. If a coupon payment has just been made, what is the current price of the bond?

6 Bond prices and interest rate changes [LO 5]

Consider two 12 per cent $100 government bonds that differ only in that one matures in 2 years' time and the other in 5 years" time. Both bands are currently selling for $100 and pay coupon interest annually.

a) What will be the price of each bond, given an immediate fall in the required yield to 10 per cent per annum?

b) What will be the price of each bond, given an immediate increase in the required yield to 14 per cent per annum?

c) Explain the relative price movements in response to interest rate changes as evidenced by parts (a) and (b).

7 Bond prices and interest rate changes [LO 5] Welshpool Investments Ud has a portfolio of 5 bonds (A, B, C, D and E). Their terms to maturity are 2, 3, 5, 10 and 25 years respectively. Each of the bonds has a coupon interest rate of 8 per cent per annum and a yield of 6 per cent per annum and each has just made a coupon payment. All 5 bonds pay annual coupons.

a) Calculate the price of each bond.

b) Re-calculate the price of each bond if the required yield on each bond increases to 7 per cent per annum.

c) Comparing your answers to (a) and (b), what patterns are evident? Explain.

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