Reference no: EM132958197
Question - Sports image management company RSCL has outstanding bonds with a maturity of 5 years, having a face value of $ 1,000 and paying a semi-annual coupon of $ 36. His bonds are selling for $ 1,085.71 today.
Mr Sprott buys this bond and sells it after 16 months (so 1 year and 4 months, during which Mr Sprott received 2 coupons).
1) What is the rate of return required by the bond market for this bond? Express this rate according to bond conventions.
2) Is this bond traded at par, at a premium or at a discount? Justify by giving the fundamental reason!
3) At the end of the 16th month, what is the transaction price if the rate of return required by the market is 9.00% (annual nominal, capitalized semi-annually)?
4) If Mr. Sprott can reinvest the coupons received at the periodic bi-monthly interest rate of 0.5%, what is the rate of return achieved over the 16-month holding period? Express this rate as an annual effective rate.
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