Question

Problem B,

MaGAP Inc issued a Floating Rate Bond, paying semi-annual coupons at the rate of

(i_c/2) = [ref rate + 120 BPs]/2. The face value of the bond is $1000 and the current reference rate is 10.8%. The remaining time to maturity is 8 years (16 coupons) and the current market price of the bonds is P = $905.53.

Currently, each coupon is expected to pay ($)

a. 108

b. 120

c. 60

d. 54

The YTM (based on the current assumed cash flows) of the above floater is %

a. 12%

b. 13.%

c. 14%

d. 15%

The above floating rate bond is currently trading at the annual EffectiveMargin, (in BPs) of

a. 320

b. 22

c. 120

d. 196

Answer 1

ic/2=(ref rate + 120 BPs)/2	100 BPs=1%
ic/2	(10.8+1.2)/2
ic/2	6	%
Currently each coupon is expected to pay
c. 60
(1000*6%)
Currently the Bond is selling at a Discount ie, YTM (Yeild to Maturity)(Investors Expected Return) will be greater than Coupon Rate ie 12%.
So let's assume 14% as YTM
Price of Bond= P V of Coupon Payments+P V of redemption
P V of Coupon Payments=Coupon Payments*Annuity Factor @ 7% for 16 half years.
P V of redemption amount=redemption amount* P V Factor @ 7% for 16 half years.
P V Factor & Annuity Factor @ 7% for 16 half years.
Using Calculator
Press 1/1.07
For P V Factor Press "=" for 16 times
For Annuity Factor Press "GT"
Price of Bond=(60*9.447)+(1000*.3387)
Price of Bond	905.52
while using 14% YTM Bond Price is Current Market Price. Ie,
Answer
c. 14%