Question

You are planning on buying $100,000 face value of Australian Commonwealth Government Bonds. The bonds mature on 15 February 2016 and have a coupon rate of 4.75%. If your purchase will settle on 27 April 2012, and the quoted yield for the bond is 5.32%, what is the cash price of the bonds to the nearest dollar?

Answer #1

Par/Face value | 100000 | ||||

Annual Coupon rate | 0.0475 | ||||

Annual coupon | 4750 | ||||

Present Value = Future value/ ((1+r)^t) | |||||

where r is the interest rate that is 5.32% and t is the time period in years. | |||||

price of the bond = sum of present values of future cash flows | |||||

r | 0.0532 | ||||

mt | 1 | 2 | 3 | 4 | |

future cash flow | 4750 | 4750 | 4750 | 104750 | |

present value | 4510.065 | 4282.249 | 4065.941 | 85135.49 | |

sum of present values | 97993.74 | ||||

The cash price of the bonds to the nearest dollar is $97994. |

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