The active strategy is to purchase $100 million in 8% coupon, semiannually compounded, 25-year bonds priced to yield 10%.
If interest rates fall to 8% immediately after the purchase of this bond, what’s is the new value of the bond?
[Source: Schweser B3,P50,Q17]
122.133 Million … an answer I do not agree with, bcos it is not the CFAI way…
the original bond costs 817 $ or so.
100 Mill / 817 = 122.133 K Bonds.
Now Bond became a Par bond - so 122.133 K * 1000 = 12.133 Million.
Agreed. PV=100m while PMT depends on FV.
I did this question recently, its just poorly put together. They need to be more clear with regard to the purchase. They are saying that the purchase of $100m is the actual market value of the purchase, rather than par or face value, which is the standard representation.
So basically since you are spending $100 mm out the door on bonds that will yield 10% in an 8% environment with 25 years, you know you are getting over 100k bonds because they are priced at a discount and you are spending 100 mm.
The price changes from $81.744 to $100 right after the rate changes from 10% to 8%.
So $100mm changes to $122.33mm.
Thanks.
but the assumption of a 1000$ Par Bond and so on … not so sure about that part.
yes that is the convention in the US - but 