Question

A 5% perpetuity bond has a prince of $980 its YTM=5.10%. Suppose you are holding the bond to partially offset an obligation in 11 years. How much will you have from holding this bond and selling it in 11 years?

Answer 1

Answer.

Current Yeild from Bond (C.Y) = Annual Interest of Bond (C) / Market Price of the bond (P)

5.10% = C $ 980

C = $980 5.10% = $ 49.98

   So, the annual Interest or the Coupon (C) is $49.98 or $ 50.

   Yeild to Maturity (YTM) = $ 50 11 years = $ 550

Money Received from holding bond and selling it after 11 years = $550 + $1,000 (Face Value)

= $1,550

Therefore, the obligation to the extent of only $1,550 can be partially met.

If the exact coupon $49.98 is taken in stead of aproximate $50, YTM wil be $549.78 and on sell of bond total money received from the bond will be $1,549.78.

A bond's coupon rate is equal to its yeild to maturity (YTM) if bond are purchased at Par. But, YTM (5.10%) is higher than coupon rate (5%), because the bond is purchased at discount of $20 i.e. in $980 in this case.

The Face Value of the bond is $1,000 and the coupon rate is 5% per year. So, the annual payment (C) is $ 50.