Question

An investor bought $10 million worth of a bond issued by PQR Corporation

with nominal yield of 3% and maturity of June 30,2030 on June 30,2020 at face value (ie, price of $100.00).

If the investor sold the same bond on June 30,2021, the yield on US Treasury Bonds was 1.6210% and PRQ’s spread was 100 basis points,

the investor would (lose) (                        )dollars.

Answer 1

Solution:

Calculation of Price of bond on June 30.2021.

Since the face value and price of bond on June 30,2020 is same,hence the YTM and nominal yield will also same.Now price of bond,when YTM is 2.621%(1.6210%+1%) is;

=annual cuopon*[email protected]% for 9 years+Maturity value*[email protected]% for 9th year

=($100*3%)*7.925559+$1000*0.792271

=$23.78+$79.22

=$1030.00

It menas that if the investor sold the same bond on June 30,2021,he will gain;

=$1030.00-$100

=$30.00 per bond

Total gain=$30.00*($10,000,000/$100)

$3,000,000