Question

An investor with a 4-year investment horizon purchases a bond that pays coupons annually at a rate of 7%. At the time of purchase, the bond has 10 years left to maturity and is selling at 93.2899 per hundred of par , with a YTM of 8%.

Determine the bond's carrying value at the end of the investment horizon.

Answer 1

As it the YTM > Coupon rate it means bond is sold on discount which is less than the face value which we can see in the question.

Discount offered is = 100 - 93.2899

= 6.7101

No we need to amortize this discount over the term of bond on an straight line basis. So per year amortization of bond is =

Discount / number of years

6.7101 / 10 = 0.67101

Carry value of bond = Face value - unamortized discount

As we have to calculate the carry after a period of 4 years so we will subtract the value of 6 years which is

100 - (0.67101*6) = 95.97394 = carry value