In: Finance
You are planning on buying $100,000 face value of Australian Commonwealth Government Bonds. The bonds mature on 15 February 2022 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 3.92%, what is the cash price of the bonds to the nearest dollar?
Price of bond | = | Present value of all coupon payments at yeild+present value of redemption price at yeild | ||||||||||
Yeild | = | 3.92% or 0.0392 | ||||||||||
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 2022 | = | 9 years | ||||||||||
Total time to redemption | = | 9years+0.8055year | ||||||||||
= | 9.8055 years | |||||||||||
Price of the bond | = | [coupon*PVAF(yeild,time)]+PVF(Yeild,time)*redemption value | ||||||||||
= | [coupon*PVAF(3.92%,9.8055years)]+100,000*PVF(3.92%,9.8055yrs) | |||||||||||
= | (4750*8.0129)+(100,000*0.6859) | |||||||||||
= | 38061+68590 | |||||||||||
= | $106,651 | |||||||||||
Cash price of bond is $106,651 | ||||||||||||
Please upvote the answer | ||||||||||||
In case you have any doubt,please ask in the comments | ||||||||||||