Answer to Question #208107 in Financial Math for Beauty Magadlela

Question

Consider Bond XYZ

Coupon rate: 9,75% per year

Yield to maturity: 11,4% per year

Maturity date: 15 April 2046

Settlement date: 29 November 2021

The clean price is

[1] R88,77706%.

[2] R81,69720%.

[3] R85,22964%.

[4] R86,37296%.

[5] R86,39294%

Answer 1

Correct answer is option [5] R86,39294%.

To get the clean price of the bond, we will use the 'PRICE' function in excel.

Formula

=PRICE(settlement, maturity, rate, yield, redemption, frequency, [basis])

 

1. Settlement – The bond’s settlement date.
2. Maturity – date when the bond expires.
3. Rate – the annual coupon rate of the bond.
4. Yield -The annual yield of the bond.
5. redemption- the redemption value of the bond per $100 face value.
6. Frequency – The number of coupon payments per year.
7. Basis – Specifies the financial day count basis that is used by the bond.

 

explanation

as Shown above, we will first enter '=' sign, then type 'PRICE' and select the price function from the list. After that, we will add the inputs as suggested. Settlement date, maturity date, coupon rate, yield to maturity, redemption per 100 (100 if redeemable at par), frequency of payments, and basis.

redemption (required argument) – This is the redemption value of the bond per $100 face value.

If we solve for this, we will get 86.444.

Thus,

Price of the bond will be close to 86.44.

Thus option (5) is the closest to the price of the bond.