Question

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 changes to 12%, what would the capital gains yield be?

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.
1.4.2 Calculate the current yield.
1.4.3 Calculate the total Rand return.

Note on the questions above. Can you provide me with a more detailed calculation as to how you got to your answers for the questions and not just the answer after formula has been provided. Thank you

Answer 1

1.1 Calculation of prevailing interest rate:

Price of bond (BO) = Cashflows   PVIFA (i % r years) + Redemption value PVIF (i % r years)

Where,

i = interest rate

r = period in years

PVIF = present value interest factor

PVIFA = present value interest factor annuity

Detailed explanation:

  plug your numbers into the interest formula to get your rate

  convert the interest rate to a percentage by multiplying it by 100.

refer to your most recent statement to fill in the interest equation

make sure that your time and your rate are on the same scale

1.2 If the prevailing interest rate is 12%, effect on bond price

A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.when market interest rate rise, prices of fixed rate bonds fall.

Higher market interest rates lower fixed-rate bond prices

Lower market interest rates    higher fixed-rate bond prices

1.3 Bond have an inverse relationship to interest rates; when interest rates rise, bond prices fall, and vice-versa. At first glance, the inverse relationship between interest rates and bond prices seems somewhat illogical, but upon closer examination, it make good sense.

1.4.1 Calculation of capital gain yield :(CGY)

A capital gain yield is the rise in the price of a security, such as common stock. for common stock holdings, the CGY  is the rise in the stock price divided by the original price of the security

Calculated as:

Capital Gain Yield =  

PO = Original purchase price of the security

P1 = Current market price of the security

1.4.2 Calculation of current yield:  

This measures examines the current price of a bond, rather than looking at its face value. current yield represents the return an investor would expect to earn, if the owner purchased the bond and held it for a year.however, current yield is not the actual return an investor receives if he holds a bond until maturity.

Current Yield = Annual cash Inflows / Market Price

1.4.3 Calculation of total rand return:

Total rand return = (P1 - P0) + D / P0

PO = Initial stock price

P1 = Ending stock price (period 1)

D = Dividends