A six-year government bond makes annual coupon payments of 5% and offers a yield of3% annually

QUESTION

A six-year government bond makes annual coupon payments of 5% and offers a yield of3% annually compounded. Suppose that one year later the bond still yields 3%. Whatreturn has the bondholder earned over the 12-month period? Now suppose that the bondyields 2% at the end of the year. What return would the bondholder earn in this case?a. What is the present value of the bond?b. Generate a graph or table showing how the bonds present value changes for semiannually compounded interest rates between 1% and 15%.
With $1,000 as the face value of bond and coupon payment as 5% and annual yield of 3%. The return on the bond if after 1 year the bond still yields 3% Year Time line Total Payment Present Value of Payments Interest Rate Coupon rate 1 2001 1000 48.54 3% 5% 2 2002 1000 47.13 3 2003 1000 45.76 4 2004 1000 44.42 5 2005 1000 43.13 6 2006 1000 1041.87 Total Present Value of Payments 1270.86 Return 27.09% Year Time line Total Payment Present Value of Payments Interest Rate Coupon rate 1 2001 1000 49.02 2% 5% 2 2002 1000 48.06 3 2003 1000 47.12 4 2004 1000 46.19 5 2005 1000 45.29 6 2006 1000 1044.40 Total Present Value of Payments 1280.07 Return 28.01% Return calculated =((Present value of bonds-Initial price of bond)/Initial price of bond) * 100 a. Year Time line Total Payment Present Value of Payments Interest Rate Coupon rate Value of Bond 1 2001 1000 7174.14 1.50% 2.5% 24.63 2 2002 1000 6999.16 2.0% 2.5% 24.03 3 2003 1000 6828.45 2.50% 2.5% 23.21 4 2004 1000 6661.91 3.0% 2.5% 22.21 5 2005 1000 6499.42 3.50% 2.5% 21.05 6 2006 1000 6340.90 4.0% 2.5% 19.76 7 2007 1000 6186.24 4.50% 2.5% 18.37 8 2008 1000 6035.36 5.0% 2.5% 16.92 9 2009 1000 5888.15 5.50% 2.5% 15.44 10 2010 1000 5744.54 6.0% 2.5% 13.96 11 2011 1000 5604.43

% 2.5% 12.51 12 2012 1000 5467.74 7.0% 2.5% 11.10 13 2013 1000 5334.38 7.50% 2.5% 9.76 14 2014 1000 2602.14 8.0% 2.5% 8.51 15 2015 1000 5077.34 8.50% 2.5% 7.35 16 2016 1000 2476.75 9.0% 2.5% 6.30 17 2017 1000 4832.68 9.50% 2.5% 5.34 18 2018 1000 2357.41 10.0% 2.5% 4.50 19 2019 1000 4599.82 10.50% 2.5% 3.75 20 2020 1000 4487.63 11.0% 2.5% 3.10 21 2021 1000 4378.17 11.50% 2.5% 2.54 22 2022 1000 4271.39 12.0% 2.5% 2.07 23 2023 1000 4167.21 12.50% 2.5% 1.67 24 2024 1000 4065.57 13.0% 2.5% 1.33 25 2025 1000 3966.41 13.50% 2.5% 1.05 26 2026 1000 3869.67 14.0% 2.5% 0.83 27 2027 1000 3775.28 14.50% 2.5% 0.65 Coupon rate would also be half of annual rateInterest rate=interest rate /2 (for semi annual treatment) Bonds present value decreases as the semi annual market interest rates increase from 1% to 15%. Table is here

ANSWER:

CLICK REQUEST FOR  AN EXPERT SOLUTION