Question

En. Iman is the owner of 100 bonds issued by LYC Bhd. These bonds have 8 years remaining to maturity, an annual coupon payment of RM80, and a par value of RM1,000. He purchased the bond 2 years ago when the interest rate was 8.5 percent. Due to the pandemic, the interest rate has fallen by 1.7 percent from it was 2 years ago. Considering this, En Iman decided not to hold the bonds till maturity but to sell it today.

Help him to compute his total capital gain from this investment

Answer 1

price of a bond:

$P=\frac{PMT(T_1)}{1+r}+\frac{PMT(T_2)}{(1+r)^2}+...+\frac{PMT(T_n)+FV}{(1+r)^n}$

where PMT(t_n) is Coupon Payment at Time n,

n is number of periods,

r is interest rate,

FV is par value

then we have, for the first two years:

$P_1=\frac{80}{1+0.085}+\frac{80+1000}{(1+0.085)^2}=991.14$

for the last 8 years:

$P_2=\frac{80}{1+0.017}+\frac{80}{(1+0.017)^2}+...+\frac{80+1000+991.14}{(1+0.017)^8}=2325.52$

total capital gain:

$100P_2=232552$