Question

QUESTION THREE – Bond Valuation

A high net-worth individual has invested in a 15-year treasury bond with par value of $1,000,000 and a 12% coupon rate. It pays coupon every quarter and the bond just made its twentieth payment. 15-year treasury bonds are currently yielding 13%, 10- year treasury bonds are yielding 10% and, 5-year treasury bonds are yielding 8%.

Required: Calculate the price of the bond and advise the bond holder to sell or hold on to the bond and why?

Answer 1

Par value - $ 1 mn
Period - 15 years
Coupon rate - 12%, payable quarterly
Total periods (15years x 4 quarters) = 60
No. of payments made = 20
No. of periods remaining = 60-20 = 40
Current yield of 15 year treasury bonds = 13%
No of periods = 40
Interest per period = 12%/4 = 3%	Interest amt = 1,000,000 * 3.% = 30,000
DF @ 13% per quarter = 13%/4 = 3.25%
Compounding period	Cash Flow	DF @ 3.25%	Cash flow x PV
1	30000	0.969	29,055.69
2	30000	0.938	28,141.10
3	30000	0.909	27,255.31
4	30000	0.880	26,397.39
5	30000	0.852	25,566.48
6	30000	0.825	24,761.72
7	30000	0.799	23,982.30
8	30000	0.774	23,227.41
9	30000	0.750	22,496.28
10	30000	0.726	21,788.16
11	30000	0.703	21,102.34
12	30000	0.681	20,438.10
13	30000	0.660	19,794.77
14	30000	0.639	19,171.69
15	30000	0.619	18,568.22
16	30000	0.599	17,983.75
17	30000	0.581	17,417.68
18	30000	0.562	16,869.42
19	30000	0.545	16,338.42
20	30000	0.527	15,824.14
21	30000	0.511	15,326.04
22	30000	0.495	14,843.62
23	30000	0.479	14,376.39
24	30000	0.464	13,923.87
25	30000	0.450	13,485.58
26	30000	0.435	13,061.10
27	30000	0.422	12,649.97
28	30000	0.408	12,251.79
29	30000	0.396	11,866.14
30	30000	0.383	11,492.63
31	30000	0.371	11,130.88
32	30000	0.359	10,780.51
33	30000	0.348	10,441.17
34	30000	0.337	10,112.52
35	30000	0.326	9,794.20
36	30000	0.316	9,485.91
37	30000	0.306	9,187.32
38	30000	0.297	8,898.13
39	30000	0.287	8,618.05
40	30000	0.278	8,346.78
40	1000000	0.278	278,225.92
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