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QUESTION 1: BOND CHARACTERISTICS AND VALUATION [35 MARKS] Azmins broker has shown him two bonds. Each has a maturity of 6 years, a par value
QUESTION 1: BOND CHARACTERISTICS AND VALUATION [35 MARKS] Azmins broker has shown him two bonds. Each has a maturity of 6 years, a par value of RM1,000, and a yield to maturity of 12.00 percent. Bond A has a coupon interest rate of 6.50 percent paid annually. Bond B has a coupon interest rate of 14.00 percent paid annually. a) Calculate the selling price for each of the bonds. (9 marks) b) Azmin has RM50,000 to invest. Judging on the basis of the price of the bonds, calculate either one Azmin could purchase if he were to choose it over the other. (Azmin cannot really purchase a fraction of a bond, but for purposes of this question, assume that he can.) (6 marks) c) Find the yearly interest income of each bond on the basis of its coupon rate and the number of bonds that Azmin could buy with his RM50,000. (6 marks) d) Assume that Azmin will reinvest the interest payments as they are paid (at the end of each year) and that his rate of return on the reinvestment is only 10.00 percent. For each bond, estimate the value of the principal payment plus the value of Azmins reinvestment account at the end of the 6 years. (9 marks) e) Explain the reason why the two values calculated in part d) are different. If Azmin were worried that he would earn less than the 12.00 percent yield to maturity on the reinvested interest payments, justify which of these two bonds would be a better choice. (5 marks)
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