Question

1. What is the price of a 25-year sovereign bond with a 4.5 per cent yield with annual coupons of 3.5 per cent and a £1,000 face value? How do you define a sovereign bond? Take the above bond in and determine what would be the price of this bond if it paid no coupons? How would you define this type of bond? What would be the benefits for a corporation to issue a bond with no coupons?

Answer 1

Price of the bond is equal to = PV of all annual coupon payments + face value at then end of 25 years.

Please refer attached screen and formula how to compute price of the bond.

our price is $852.

2. A Sovereign bond is a debt instrument which is issued by the federal government of the country and can be denominated either in domestic or any other foreign currency

3) Without payment of coupon payment the bond will behave similar to zero coupon bond which trades at deep discount and pays face value on maturity. Below screen shot shows the price of the bond without coupon payment which is $332.

4) one of major advantage is that they have higher interest rate compared to normal bonds. In order to attract investors and to keep long term prepositions companies tend to issue bonds without coupon payments.