QUESTION 1 (30 marks) Jo-Anne just bought 200 bonds at a purchase price of R1 043.70...

QUESTION 1

Jo-Anne just bought 200 bonds at a purchase price of R1 043.70 each. The bonds will mature in 7 years’ time and have a face value of R1 000.00. The coupon rate is 11% and is paid semi-annually. Answer the questions that follow:

1.1 Calculate the prevailing interest rate. (5)

1.2 If the prevailing interest rate is 12%, what would happen to the price of the bond? (5)

1.3 If Lee-Anne bought the bonds at R1 043.70 and the prevailing interest rate changes to 12%, what would the capital gains yield be? (4)

1.4. Lee-Anne bought the bonds at R1 043.70 and after four years she decides to sell the bonds while the prevailing interest rate is 9%. Answer the following questions relating to this scenario:

1.4.1 Calculate the capital gains yield. (5)

1.4.2 Calculate the current yield. (3)

1.4.3 Calculate the total Rand return. (3)

1.5 Explain in your own words the relationship between prevailing interest rates and bond prices and why the prices of bonds can change. (5)

[30 marks

Expert Solution

jeff jeffy answered 6 months ago

Jo-Anne just bought 200 bonds at a purchase price of R1 043.70 each. The bonds will...

Jo-Anne just bought 200 bonds at a purchase price of R1 043.70 each. The bonds will mature in 7 years’ time and have a face value of R1 000.00. The coupon rate is 11% and is paid semi-annually. Answer the questions that follow: 1.1 Calculate the prevailing interest rate. 1.2 If the prevailing interest rate is 12%, what would happen to the price of the bond? 1.3 If Lee-Anne bought the bonds at R1 043.70 and the prevailing interest rate...

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o-Anne just bought 200 bonds at a purchase price of R1 043.70 each. The bonds will mature in 7 years’ time and have a face value of R1 000.00. The coupon rate is 11% and is paid semi-annually. Answer the questions that follow: 1.1 Calculate the prevailing interest rate. 1.2 If the prevailing interest rate is 12%, what would happen to the price of the bond? 1.3 If Lee-Anne bought the bonds at R1 043.70 and the prevailing interest rate...

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