QUESTION 2 – Valuing Bonds – 20 marks Treasury bills LICI tendered for $5m of 180 days...

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Finance

QUESTION 2 – Valuing Bonds – 20 marks
Treasury bills
LICI tendered for $5m of 180 days Treasury Bills (T-Bills) at ayield of 5.0 percent at 9.30am today. At 2pm LICI was informed thattheir tender of $5m was successful and payment needs to be made tothe Reserve Bank by 3.30pm today.
How much will LICI pay to the ReserveBank?
After 120 days of holding on to the T-Bills, i.e. 60 days leftto maturity, LICI is contemplating selling the $5m T-Bills to theReserve Bank. According to the current yield curve, the T-Billrates are as follows:
180 days are yielding 4.95 percent
120 days are yielding 4.90 percent
90 days are yielding 4.87 percent
60 days are yielding 4.85 percent
30 days are yielding 4.80 percent
How much can LICI sell the $5m T-billsfor after holding it for 120 days?
(b) Bonds
Semi Leba, a retiree, invested part of his FNPF funds ingovernment bonds. Semi holds $50,000 worth of Viti Bonds. Thecoupon rate of this Viti Bond is 5%. This bond pays coupon everyquarter. The bond will mature in exactly 5 years from today. Thecurrent market rate for 5-year treasury bonds is 4.5%.
QUESTIONS
What is the value of this bond today?
Is this a premium or discount bond? Why?
What should Semi do with his bond? Give reasons for yourrecommendation.

Answer & Explanation Solved by verified expert

3.9 Ratings (708 Votes)

a Amount paid by LICI to Reserve Bank 5 million 1 005 180 360 487804878 After 120 days there are 60 days remaining to maturity LICI can sell the bonds for 5 million 1 00485 See Answer

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QUESTION 2 – Valuing Bonds – 20 marksTreasury billsLICI tendered for $5m of 180 days Treasury Bills (T-Bills) at ayield of 5.0 percent at 9.30am today. At 2pm LICI was informed thattheir tender of $5m was successful and payment needs to be made tothe Reserve Bank by 3.30pm today.How much will LICI pay to the ReserveBank?After 120 days of holding on to the T-Bills, i.e. 60 days leftto maturity, LICI is contemplating selling the $5m T-Bills to theReserve Bank. According to the current yield curve, the T-Billrates are as follows:180 days are yielding 4.95 percent120 days are yielding 4.90 percent90 days are yielding 4.87 percent60 days are yielding 4.85 percent30 days are yielding 4.80 percentHow much can LICI sell the $5m T-billsfor after holding it for 120 days?(b) BondsSemi Leba, a retiree, invested part of his FNPF funds ingovernment bonds. Semi holds $50,000 worth of Viti Bonds. Thecoupon rate of this Viti Bond is 5%. This bond pays coupon everyquarter. The bond will mature in exactly 5 years from today. Thecurrent market rate for 5-year treasury bonds is 4.5%.QUESTIONSWhat is the value of this bond today?Is this a premium or discount bond? Why?What should Semi do with his bond? Give reasons for yourrecommendation.