Question

Hi experts, I am struggled with how to solve the financial accounting for the below questions, please help me

Upon the successful completion of its first project – ABC Investment (TDI) decides to launch the second phase of the project, which is financed by the company’s USD-denominated bond under the following terms: Seven years to maturity, coupon rate 10% paid semi-annually, par value 1,000, and yield to maturity 20%

a/ At what price is the bond selling for now?

b/ Two years passes by for bonds of the same credit rating (risk), the market requires 10%. At what price should the bond be selling at this time?

c/ What is the bondholder’s rate of return over the first year of holding the bond? If inflation is 5%, what is the real rate of return over the year?

Answer 1

(a ): Current price= $631.67

(b ): Since the market interest rate (YTM) has become equal to coupon rate of 10%, price is equal to par value ie., $1,000

(c ): Holding period return (HPR) over the first year (YTM 20%) = 20.208442%

With inflation of 5%, approximate real rate of return= Nominal rate- Inflation= 20.20%-5%= 15.20%

Exact real rate of return= 14.484230%

Details of calculations as follows:

Calculation of price and HPR:

Calculation of Real Rate of Return: