You see a person drop an envelope at a busy airport. There is a better than 85% chance that you can catch the person who dropped it, if you wanted to, but it would take a running effort by you. Because it is a busy airport, there is also the possibility that someone else also saw the envelope drop, and could see you pick it up, but they would not know what it contained. It turns out that the envelope contains ten (10) Registered Bonds and ten (10) Bearer Bonds, all with a coupon rate of 8.84%. The bonds pay interest semi-annually and have five (5) years left to maturity. The yield-to-maturity is 7.50%.
What is the Present Value of all of the Bonds?
Given the circumstances in this Bond question, what would you do, and why?
Finding the present value of all the bonds
We use the financial calculator to find value of each bond:
N = 5 *2 = 10
IY = 7.5/2 = 3.75
PMT = 8.84 /2 %*1000 = 44.20
FV = 1000
Compute PV, we get 1055.03
Hence value of 10 registered and 10 bearer bonds = 20 bonds * 1055.03 = 21100.51
We see that it contains registered bonds as well as bearer bonds.
Registered bonds are registered with the issuer. Hence the owner details are already with the issuer and all the payments can directly be credited to the investor.
However, bearer bonds are opposite of above. Payments are made to the person who holds the bonds.
What we can actually do, is to get the details of the person from registered bonds issuer about the investor. Through the details we can get in touch with the actual owner to give the bearer bonds back to the owner. It should be noted that there is no risk of loosing the physical copy of registered bonds.
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