Answer to Question #284009 in Finance for dora

Question

GG fund invested in 1,000 units of 7 percent, 15-year, RM1,000 bond issued by SLC

Bhd. The bond was issued on 1/11/2018 at par. The firm bought the bonds on 1/11/2021

when the bond was selling at 2% discount. The firm intends to sell back all the bond when

the interest rate is expected to be at 5% on 1/11/2026. Throughout the period of holding

the bond, the firm reinvest all the coupons received in an investment alternative that pays

8% interest for the 1st 3 years and 9% interest for the remaining years. You

are required to assist GG fund to determine:

i) their total yield from this bond investment

ii) total capital gain from this investment

Answer 1

Solution:

Purchase price= Face value*(1-Discount)

Price is the present value of future coupon payments and redemption value, discounted at the YTM as discount rate. Price of the given bond is calculated using PV function of Excel. YTM per  is the 'Rate', number of coupon payments ahead is the NPER and amount of coupon per period is the Pmt for this purpose.

Capital gain is the sale price in excess over purchase price.

Part (i) : Total yield (annualized) = 9.28%

Part (ii) : Capital gain= RM135,727.47

Calculations as below: