Question

A $1,000 face value,semi-annual coupon bond,with a coupon rate of 6.00% per annum has a maturity of five years.

This bond currently yields 7.00% per annum,compounded semi-annually.

At the end of two years,this bond sells for $1,030.00.

a)What price would you pay for the bond now?

b)What is the holding period yield?

c)What is the default risk for a bond?Explain carefully why this risk arises for a bond.

Part 2

In relation to the share market,explain what is meant by market liquidity. Examine twofactors thanks t facilitate the liquidity of the share market.

In your answer,identify two factors,explain what these mean and examine how the factors enhance or deter liquidity in the share market.

Answer 1

(a) What price would you pay for the bond now?

Two years are over, now the time to maturity is 3 years

Given the current market rate of 7.000% for a similar bond, a bond with a face value of $1,000.00 and paying a coupon rate of 6.000% (compounding semi-annually), should be selling for $973.36 (selling at a discount). Here is how I arrived at my answer:

You can find the bond price using a spreadsheet to calculate and sum the present values of the par value and all of the coupon payments, like this

(b)What is the holding period yield?

Now the time to maturity is 3 years. If I holds the bond till maturity total return would be $ 973.36 and the investment would be the current selling price, ie $ 1030. So it ends up in loss. - Negative Yield

(c) What is the default risk for a bond?Explain carefully why this risk arises for a bond

Default risk in bond investing refers to the chance that a bond-issuing company or government would fail to make its debt and interest payments. As a bond investor, you can lose 100% of your investment along with uncollected interest.

Several factors can push a company to default on its bond payments. From internal dysfunction to a fragile economy, plenty of events can cripple a company, causing its inability to make its bond payments. Even a government can collapse and go into default on the bonds it issues.

PART 2

In relation to the share market,explain what is meant by market liquidity......

Market liquidity impacts everything from the bid-offer spread to trade execution. Liquidity describes the extent to which an asset can be bought and sold quickly, and at stable prices. In simple terms, it is a measure of how many buyers and sellers are present, and whether transactions can take place easily. Usually, liquidity is calculated by taking the volume of trades or the volume of pending trades currently on the market.

High levels of liquidity arise when there is a significant level of trading activity and when there is both high supply and demand for an asset, as it is easier to find a buyer or seller. If there are only a few market participants, trading infrequently, it is said to be an illiquid market or to have low liquidity.

Factors affecting share market liquidity

Firm size, compression of ownership structure, level of information asymmetry, utilization rate of margin trading, absorbed stocks of investors.

The firm size is positively related to liquidity, the more scattered ownership structure is, the higher the liquidity will be, the more critical information asymmetry is, the lower the stock liquidity will be, the higher margin trading utilization is, the higher the stock liquidity will be, the liquidity of an individual stock is positively related to the liquidity of the entire market and the more investor's perceptions are absorbed, the higher the stock liquidity will be.