UECM1404 Theory of Interest

Tutorial 9: Bonds

1. Bart buys a 28-year bond with a par value of 1200 and annual coupons. The bond is
redeemable at par. Bart pays 1968 for the bond assuming an annual effective yield rate of
. The coupon rate is twice the yield rate. At the end of 7 years, Bart sells the bond for ,
which produces the same annual effective yield rate of for the new buyer. Calculate . .
. . . . . . . . . . . . . . . . . …….. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ans: 1842

2. Jim buys a 10-year bond with a par value of 10,000 and 8% semiannual coupons. The
redemption value of the bond at the end of 10 years is 10,500. Calculate the purchase
price to yield 6% convertible quarterly. . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . Ans: 11,727

3. A bond with coupons equal to 40 sells for . A second bond with the same maturity value
and term has coupons equal to 30 and sells for . A third bond with the same maturity
value and term has coupons equal to 80. All prices are based on the same yield rate, and
all coupons are paid at the same frequency. Determine the price of the third bond. . . . . . .
. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …. . . . . . . .. .Ans: 5 − 4

4. Smith purchases a 20-year, 8%, RM1000 bond with semi-annual coupons. The purchase
price will give a nominal annual yield to maturity, convertible semi-annually of 10%.
After the 20th coupon, Smith sells that bond. For what price did Smith sell the bond if his
actual yield (nominal annual convertible semi-annually) during the time he held the bond
is 10%? . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ans: RM875.38

5. A RM100 bond with annual coupons is purchased at a premium of RM36 to yield 3.5%
per annum effective. The amount for amortization of premium in the 5th year is RM1.00.
Find the term of the bond (in years). . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ans: 26

6. A bond can be redeemed on a coupon date anything between 18 and 22 coupon period
from now. The bond has face amount 100 and coupon rate 10% per coupon period. Find
the maximum possible yield rate and the minimum possible yield rate that will earned on
the bond if it is purchased at a price of (i) 80, or (ii) 120. . . . . . . . . . .Ans: 12.75%; 7.88%

7. Smith buys a bond with 5% annual coupons at an annual effective yield rate of 4%. The
bond is callable at the option of the bond issuer any time from the 20th to the 25th
coupon. Just after the 10th coupon is paid, the market yield rate on the bond is 6% and
Smith sells the bond. Find the annual effective yield rate on Smith's investment for the 10
year period that he held the bond, assuming that the bond will be redeemed at par.
………………………………………………………………………………… Ans: 2.60%