In: Finance
Mordecai bought a 3-year 15% Treasury bond on 8 May 2020 at a
yield of j2 = 18.6% p.a. Coupons can be reinvested at j2 = 14.0%
p.a. The bond will be redeemed at par on the maturity date (face
value $100).
a. [2 marks]Calculate the total accumulated value at maturity
generated by this bond if Mordecai holds it to maturity and
reinvests all coupon payments received at the available rate.
b. [2 marks]Calculate the total realised compound yield (TRCY) of
this bond.
c. [2 marks]Decompose the total accumulated value generated by this
bond into: original purchase price, coupons, interest on coupons,
and capital gain/loss.
d. [2 marks]If Mordecai holds the bond for 2 years and sells it for
a yield of j2 = 18.8% p.a., calculate the holding period yield
(HPY).
e. [2 marks]Calculate duration of this bond if it is held to
maturityf. [3 marks]Use the concept of modified duration to estimate
the price of the bond if the yield to maturity increases to j2 =
18.7% p.a. immediately after Mordecai buys the bond.
g. [3 marks]What fixed liability could Mordecai be reasonably
confident of paying off in 21/2 years’ time? Why?