Bond Valuation Seminar Questions 1. You are considering buying a 10-year UK treasury gilt (government bond) with a face value of 1,000 and 5.25% coupon payment, thus earning you 52.50 interest per year until the gilt matures. The treasury gilt has 6 years remaining and is due to mature on 31st October 2016. When the bond matures you will receive the final interest payment plus the 1,000 interest payment. Given the return on the next best investment would be 6.35%, calculate the present value of the treasury gilt. What will determine whether, or not, you decide to purchase the treasury gilt. 2. A 500 Government Bond has a coupon rate of 6%, paid annually. The current price of the bond is 450 and it will be repaid in full in three years time. Calculate the yield on the bond. 3. Reunion plc, currently has in issue 10 year corporate bonds with a total face value of 10 million. Each bond has a face value of 100. The coupon payment on the bond is 10% per annum and the bond is due to mature in 2015. This means that Reunion plc has five years of interest payments left to maturity (2012, 2013, 2014, 2015 & 2016). In 2016, Reunion plc will have to repay the 10 million (100 to each bond holder) to its debt investors. Given that the next best alternative investment for its debt holders is presently 6%, calculate the current price of each bond. 4. Given the current price of the bond you calculate in question 3, what is the total value of Reunions debt? 5. Using the UK gilt yield data provided on the week 6 lecture slides, assess the short-term and medium-term expectations for UK interest rates and inflation