Johnyboy18
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Registered: 17th Feb 04
Location: Chelmsford Drives: ibiza cupra
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Anyone know much about finance, doing a module on it at uni. This sort of question always comes up in the exam apparently:
a) If Interest rates are 5% what is the fair price of a 3 year government bond with a face value of £100 paying an annual coupon of 6%?
b) How much would you pay of interest rates rose to 7%?
c) Comment on the relationship between bond price and interest rate.
Could anyone help? please.
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Ally
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Registered: 2nd Jul 03
Location: Pontypool Drives: a Skoda
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a) coupon?
b) £107
c) bond price increases and interest rates increase
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Ally
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Registered: 2nd Jul 03
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eek B) £321
??
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Johnyboy18
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Registered: 17th Feb 04
Location: Chelmsford Drives: ibiza cupra
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god knows i dont understand it lol, anyone?
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Ally
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Registered: 2nd Jul 03
Location: Pontypool Drives: a Skoda
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Bonds provide an element of stability that offsets some of the volatility stocks. However, they are vulnerable to economic changes that can undermine their value.
The biggest economic threat to bonds is rising interest rates. If you own a bond and interest rates go up, the value of your bond on the open market, with few exceptions, will go down.
Of course, if you plan to hold the bond to maturity the value of your bond doesn’t change because interest rates change. You’ll still get the amount promise when you bought the bond, all other things being equal.
However, if you plan to own bonds for investment purposes - that is you buy and sell bonds as you would stocks - then interest rates are very important.
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Johnyboy18
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Registered: 17th Feb 04
Location: Chelmsford Drives: ibiza cupra
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so initially the bond will make a profit, however when interest rates rise value of the bond will decrease.
maybe for a) its 100 x 0.06 = 106, and then 106 / 0.05 for interest rates. and continue the process for the next two years maybe?. c) is sorted because the answer is basically stating that if interest rates decrease/increase and price of the bond will be affected etc.
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ChazSXi
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Registered: 26th Jan 03
Location: Waterlooville, Hampshire
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a) £100 with interest @ 5%= £115.76
£100 with bond coupon @ 6% = £119.10
b)£100 with interest @ 7% = £122.50
c) if interest rates increase a bond will not be worth as much as an investment so their value has decreased
some random figures i got - dunno if they are any use! 
[Edited on 14-02-2005 by ChazSXi]
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Ally
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Registered: 2nd Jul 03
Location: Pontypool Drives: a Skoda
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c) the cost of buying a share will increase, the cost of selling a share, however, will decrease...
Is this for FPC?CMAP?
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Johnyboy18
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Registered: 17th Feb 04
Location: Chelmsford Drives: ibiza cupra
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C) is sorted now, i can read up on that stuff. just gettin the calculations right for a and b is more importants. this question is worth 25% of the exam lol, a and b are 9 marks each
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