Question

1. A. Two years ago, you purchased a new10-year bond issued by APPLE with a face value of $1,000 and coupon interest rate of 3%. Given the current crisis, bonds of equal risk and maturity are now 2%, so you decide to sell the bond. Calculate the selling price (4 points).

2. Calculate the Annualized HPR from your investment (2).

Answer 1

a. We need to calculate the PV of the annual interest of $30, i.e., $1000 x 3%, for the next 8 years, and the principal payment of $1000 at the end of year 8, at the rate of 2%, which is the current discount rate. That will give us the value of this bond now. I can sell this bond for $1073.25 now

Time	CF	PV = CF / 1.02^time
1	30.00	29.41
2	30.00	28.84
3	30.00	28.27
4	30.00	27.72
5	30.00	27.17
6	30.00	26.64
7	30.00	26.12
8	1,030.00	879.10
	Total	1,073.25

b. We need to calculate an IRR for the $1000 of investment 2 years, ago, 2 interest payments, and the selling price now. Annualized HPR is 6.55% p.a.

Time	CF
0	-1,000.00
1	30.00
2	1,103.25
IRR	6.55%