Question

Hasil Banyak Berhad has issued 5 3/4 percent bonds that mature on April 30, 2040. The bond is attached with a put option with a strike price at RM945.50, which will be effective from April 30, 2035.

1. Assume that interest paid and compounded semi-annually. Determine the market return of the bond if an investor has purchased an RM1,000 denomination bond for RM986.30 on April 30, 2020, and exercise the put option.        

2. Based on the answer in (a) determine the impact of a sudden change on the company’s bond rating from AAA to AA that causes a drop of 50 basis points on the yield to maturity. You are required to determine the impact on the bond’s price.        

Answer 1