Question

Henry is planning to purchase a Treasury bond with a coupon rate of 3.22% and face value of $100. The maturity date of the bond is 15 May 2033.

(c) If Henry purchased this bond on 5 May 2018, what is his purchase price (rounded to four decimal places)? Assume a yield rate of 1.09% p.a. compounded half-yearly. Henry needs to pay 23.2% on coupon payment and capital gain as tax payment. Assume that all tax payments are paid immediately.

Select one:

a. 100.5863

b. 130.9599

c. 125.2686

d. 123.7292

Answer 1

GIven that   

Rate of coupon = 3.22%

Yield rate = 1.09%

Face value of company= $100

Based on teh above information

First determine the bond price as on May 15

The Bond price on May 15 is

=PV(1.09%/2,(2033-2018)*2,-100*3.22%/2,-100)

=$129.401123

Now

Coupon value = Rate of coupon * face value / 2

=3.22%*100/2

=$1.61

And,

Finally Bond price on May 5 = Bond price on May 15 + Coupon value

=$129. 401123 + $1.61

=$131.011123

Therefore, option (b) $130.9599 is the correct answer.