Question

Upon the successful completion of its first project – Masteri Thao Dien – Thao Dien Investment (TDI) decides to launch the second phase of the project, which is financed by the company’s USD-denominated bond under the following terms:

 Five years to maturity

 Coupon rate 8% paid semi-annually

 Par value 1,000

 Yield to Maturity 10%

a/ At what price is the bond selling for now?

b/ Two years passes by. For bonds of the same credit rating (risk), the market requires 11%. At what price should the bond be selling at this time?

c/ What is the bondholder’s rate of return over the first year of holding the bond? If inflation is 5%, what is the real rate of return over the year?

Answer 1

Price of the bond can be calculated using PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

a.rate=10%/2=5%

nper=number of periods=5*2=10

pmt=coupon payments=(8%*1000)/2=40

=PV(5%,10,40,1000,0)

PV=$922.78

The present value of the bond=$922.78

b. After 2 years passed, time to maturity=3 years and market rate=11%

rate=11%/2=5.5%

nper=number of perios=2*3=6

pmt=coupon payment=$40

PV(rate,nper,pmt,fv,type)

PV(5.5%,6,40,1000,0)

PV=$925.07

The bond would be selling at $925.07

c. real rate of return=((1+nominal rate)/(1+inflation rate))-1

=((1+10%)/(1+5%))-1

=4.76%

The real rate of return=4.76%