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? assume semi-annual coupon.

Answer 1

Face value = $100,000

Annual coupon rate = 4.75%, Semi annual coupon = 2.375 %

Yield = 5.32%, Semi annual yield= 2.66 %

Considering semi annual coupon payments between the mentioned dates, there will be 7 coupon payments:

Coupon payments= 2.375% * 1000000 = $ 2375

Bond price = 2375/1.0266 + 2375/ 1.0266^2 + 2375/ 1.0266^3+ 2375/ 1.0266^4 + 2375/ 1.0266^5 + 2375/ 1.0266^6 + 2375/ 1.0266^7 + 100000/ 1.0266^7

= $ 98201

Since, yield> coupon, hence price < par value.