Question
Currently, a bond has the face value of $1000, the remaining term of 2 years the coupon interest to be paid every six months and
Currently, a bond has the face value of $1000, the remaining term of 2 years the coupon interest to be
paid every six months and its coupon rate is set as follows:
The coupon rate = The annual yield on 10-year GOC bond, prevailing at the time of payment
(call it X) + 3.5%
Suppose the required yield-to-maturity of the bond is 7% per annum and it is expected to stay the same.
X is expected to be 3%, 4%, and 4.5% and 5% at the end of the 1st 6-month period, 2nd 6-month period,3 rd 6-month period and 4th
6-month period respectively.
Find the current price of the bond. Then consider the same data and now assume that the required annual yield-to-maturity of
the bond denoted by k, will change the X as followed, k = X + 4%, but now X used here is the X prevailing at the
beginning of each 6-monthly period. Assume X at date zero is 2.5% while other expected values are the
same as given in the previous question. Recalculate the current price of the bond
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