Question

QUESTION THREE

a. The Kenya Government has issued a 20-year bond with a par value of Ksh 6000 with an annual coupon payment. The return on other bonds of similar risk is currently 12%. The Kenya Government decides to offer a 12% coupon interest rate.

REQUIRED

What would be a fair price for these bonds?

2. Suppose interest rates rise immediately after treasury issued the bonds to 14%, but this time bond has semi-annual payments.

REQUIRED

Calculate the price of the bonds

3. Imagine you paid Ksh 50.80 for a Ksh 100 bond that has 10 years left to maturity

REQUIRED

Determine your yield to maturity

4. Suppose we paid Ksh 89,890 for a Ksh 100,000 par 10% bond with 8 years to maturity and annual coupon payments

REQUIRED

Calculate the bonds yield to maturity

Answer 1

Since, the coupon rate is same as yield, the fair price of the bond = Par value = Ksh 6,000

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Suppose interest rates rise immediately after treasury issued the bonds to 14%, but this time bond has semi-annual payments.

the price of the bonds = -PV (Rate, NPer, PMT, FV) = - PV (14%/2, 2 x 20, 12% x 6000 / 2, 6000) = Ksh 5,200.10

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Imagine you paid Ksh 50.80 for a Ksh 100 bond that has 10 years left to maturity.

The coupon rate and frequency of coupon payment is missing in this question. I am assuming annual coupon payment @ 12%, same as the original question.

Your yield to maturity = Rate (Nper, PMT, PV, FV) = Rate (10, 12% x 100, -50.80, 100) = 26.35%

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the bonds yield to maturity = Rate (Nper, PMT, PV, FV) = Rate (8, 10% x 100000, -89890, 100000) = 12.04%