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In: Finance

Brian &Co has invested in a 20 year Government bond with a Par value of $1m...

Brian &Co has invested in a 20 year Government bond with a Par value of $1m and a 12% coupon rate. It pays interest every quarter. The band has just made its 30th coupon payment. The market now requires a 10% return on the bond.

The financial controller of Brian & Co requires your help to assist with her recommendations to senior management on what FNPF should do with the bond.

Solutions

Expert Solution

Current market value of the bond is $ 1,141,811.56 calculated using PV function of Excel as follows:

As the bond is in premium, the holder can opt to sell it now and book a profit of $141,811.56. However, this is subject to the requirements of Brain & Co. regarding deployment of sale proceeds. In case Brain & Co. can deploy the money at yield higher than 10%, or for a shorter duration, sale is a good option. In case the money will be redeployed in Government bonds of similar characteristics, re-entry will be at about 10% yield which will not result in any gain in totality.

jeff jeffy answered 1 year ago
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