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a) The price of coupon bond is calculated as the Present Value of the future cash
flows including redemption at maturity.
c) The Money Market is a component of the financial markets for assets involved in
short-term borrowing and lending with original maturities of one year or shorter
time frames.
d) The price of coupon bond and the YTM are inversely related.
e) Nominal Interest Rate is the rate which is arrived without incorporating the effect
of inflation i.e. it ignores the impact of inflation on the return earned by an
instrument.
2) You are willing to pay Rs. 15,625 now to purchase a perpetuity that will pay you an
amount of Rs, 1,250 per year, forever. If your required yield does not change, how
much would you be willing to pay if this was a 20 year coupon bond paying the
same amount each year as above? ( 3 Marks)
3) A ten year, 7% coupon bond with a face value of Rs. 1,000 is currently selling for
Rs. 871.65. Compute the return if you sell the bond next year for Rs. 880.10 (2
Marks).
4) What is the difference between yield of a bond and its return. Which one is a better
indicator of how well you do when you hold a bond and why?
(5 Marks)
The yield of a Bond basically reflects the earnings resulting from interest
payments, where as the Return will reflect the over all earning from interest
rates plus the capital gains or losses arising from changes in the value of a
instrument.
How well you do by holding on to a bond will depend on the Rate of Return
which is defined as the payments to the owners in the form of coupons plus the
change in its value expressed as Fraction of its purchase price as this will
effectively capture the whole of earnings instead of just interest. Remember
that you might earn a high yield on high coupon Bonds but with an increase in
interest rates in the market, the value/price of your investment will decrease
giving you capital loss.