Question 2 (15 marks)

You have invested in a commercial bond issued by FHL, listed on SPX. The bond has a face value of $150,000 and pays coupons every four months at a rate of 8% p.a. The bond matures on 30th April, 2025. Due to some unforeseen circumstances, you urgently need to liquidate the bond and decide to sell the bond in the secondary market today, 18th June, 2020. Current yields on similar bonds are 9.5% p.a.

Required:

(Show all working else penalties will apply. Exchange rates should be rounded off to 4.d.p., whereas all other calculator-values are to be rounded off all to 2d.p. Clearly label your answers with corresponding question number and/or its associated parts.)

a. Calculate the price of the bond if it is held to maturity. (5m)

b. Calculate the price of the bond if it was sold today. (5m)

c. Assume you sold the bond today to Investor X. On 26th January, 2025 Investor X resold the bond in the secondary market to Investor Y. At the time of sale, current yields on similar bonds were 7% p.a. Calculate the price that Investor Y paid for the bond. (5m)