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You are planning on buying $100,000 face value of Australian Commonwealth Government Bonds. The bonds mature...

You are planning on buying $100,000 face value of Australian Commonwealth Government Bonds. The bonds mature on 15 February 2027 and have a coupon rate of 4.75%. If your purchase will settle on 27 April 2012, and the quoted yield for the bond is 5.81%, what is the cash price of the bonds to the nearest dollar?

Solutions

Expert Solution

Price of bond = Present value of all coupon payments at yeild+present value of redemption price at yeild
Yeild = 5.81% or 0.0581
Redemption value=face value=$100,000
Coupon=$100,000*4.75%=$4750
calculation of Time to redemption
Period (in years) from 27th april 2012 to 15th feb 2013
= 294days/365 days a year
= 0.8055 year
period from 15 th feb 2013 to 15th feb 2027 = 14 years
Total time to redemption = 14 years+0.8055year
= 14.8055 years
Price of the bond = [coupon*PVAF(yeild,time)]+PVF(Yeild,time)*redemption value
= [coupon*PVAF(5.81%,14.8055years)]+100,000*PVF(5.81%,14.8055yrs)
= (4750*9.7525)+(100,000*0.4334)
= 46324.28+43338.09
= $89,662.37
PVAF and PVF For fraction time (9.8055 yrs) Can be calculated using financial calculators or excel
Cash price of bond is $89,662.37
Please upvote the answer

jeff jeffy answered 1 year ago
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