An amount of 100,000 is required in 3.25 years’ time. Interest rates are currently 8 per cent and a company wishes to invest an amount in bonds which will grow to 100,000 at the time of maturity. Two bonds are available (see Figure 5.13).

Figure 5.13

■ Calculate the price, duration and modified duration, and estimate the change in value if interest rates rise by 1 per cent.
■ Use Goal Seek to find out what proportion of each bond the company should invest in. The formula is:

■ Calculate the present value of 100,000 in 3.25 years at the input rate of 8 per cent as this is the amount to be invested now.
■ Calculate the proportion of the present value to be invested in each bond.
■ Divide the amount by the price to find out how many bonds are required.

Transcribed Image Text:

4 6699 A Bond Settlement Date Maturity Date Coupon Coupons per Annum 8 9 10 11 Redemption 12 Basis Yield to Maturity Exercise inputs C D A B 31/12/2020 31/12/2020 c 31/12/2020 30/06/2024 31/05/2025 30/03/2024 10.00 3.00 0.00 1.00 1.00 1.00 8.00 8.00 8.00 100.00 100.00 100,000.00 0 0