A government bond with 2 years until maturity has a face value of £120,000 and an annual nominal coupon rate of 1%. Assume that the relevant nominal market interest rate (annualized) is equal to 5%. The coupon payments are made every 6 months. Calculate the present value of the bond.
A government bond with 2 years until maturity has a face value of £120,000 and an
annual nominal coupon rate of 1%. Assume that the relevant nominal market interest
rate (annualized) is equal to 5%. The coupon payments are made every 6 months.
Calculate the present value of the bond. Assume the individual coupons are stripped from the bond and sold
separately as zero coupon bonds. Calculate the market value of these zero coupon
bonds.
Assume there are no further changes to the market rate. How would you
expect the price of the bond to evolve? Assume there exist a Callable bond with similar characteristics to the
bond described above. Would you expect this Callable bond to have a higher or
lower price? Explain why.
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