Question 2A
SAI Ltd issued a $250,000 bond at the coupon rate of 2 percent payable semi-annually. Now, the bond has a remaining life of 4 years.
Two years from now, you bought the SAI bond when the market interest rate for a new SAI bond is 4 percent. How much did you pay for the bond?
Illustrate your answer using the bond valuation equation and not using an online calculator / software.
You sold the bond purchased in part i. after holding it for a year, when interest rates (for bonds of similar risk as SAI’s bonds) fell to 3 percent. What is the percentage gain / loss on the bond? Illustrate your answer using the bond valuation equation and not using an online calculator / software.