Bonds

Hej 

Jag håller på med en kurs i företagsekonomi men har fastnat på fråga C. kan ni snälla hjälpa mig

You are considering purchasing the following bond:

Face Value:                          1,000,000 SEK

Coupon rate:                         5.0 % (coupons are paid once per year)

Time to maturity1:                  30 years

The yield to maturity of the bond is 6 %.

a) What is the price of the bond today?

Price of bond today = {50000 * [(1+0.06)30 – 1]} / [0.06 * (1+0.06)30 ] + 1000000 / (1+0.06)30

= 862,352 SEK

b) For the same bond in item a, assume that we wish to sell

10 years’ time after the coupon has just been paid and that the yield to maturity has dropped to 5 % by then. What price do we receive when we sell the bond?2

= {50000 * [(1+0.05)20 – 1]} / [0.05 * (1+0.05)20 ] + 1000000 / (1+0.05)20 = 1,000,000 SEK

c) Use the table in the answer sheet and indicate the cash flows received from an investment consisting in buying the bond 30 years before its maturity, keeping it for 10 years and selling it right after coupon number 10 is paid (the investment in year 0, the coupon payments and the payment received when we sold the bond at the price computed in item b). Use the values actually paid out those years, not the present value. Also, indicate by using the sign + or – if it was a cash outflow or a cash inflow).