Question

A speculator purchased Barclays Bank Ghana Limited corporate bond for ¢500,000. The bond is expected to yield a coupon payment of ¢50,000 per annum for the next 25 years. At the end of this period, it will be necessary to buy a new bond at the cost of ¢700,000 at the same coupon rate so that the speculator can still meet his expenditures. Assuming that the coupon rate is the same as the interest, how should the purchaser provide for this future expenditure, and what will be the effect on his percentage yield?

Answer 1

Assuming that the bond was purchased at the par value (coupon rate is the same as YTM)

Coupon rate = ¢50000/¢500000 = 10%

The corporate bond will pay ¢500000 after 25 years on maturity, the remaining ¢200000 for ¢700000 bond purchase can be accumulated in the last 4 years' coupon payments of ¢50000 each year.

As the coupon rate of the new bond of ¢700000 is also same at 10%, the percentage yield will not change if the speculator also keeps the bond till maturity. It may be noted that if the coupon amounts of ¢50000 are reinvested at 10% (Yield to maturity) the realised return is also 10%