AskSia

a

The formula for the bond price is: $$ P = \sum_{t=1}^{n} \frac{C}{(1 + r)^t} + \frac{F}{(1 + r)^n} $$ where \( P \) is the bond price, \( C \) is the semi-annual coupon payment, \( r \) is the semi-annual market yield, \( F \) is the face value, and \( n \) is the total number of semi-annual periods.

For Malayawata Steel's bond: \( C = \frac{5\%}{2} \times RM1,000 = RM25 \), \( r = \frac{3\%}{2} = 1.5\% \), \( F = RM1,000 \), and \( n = 20 \) (10 years semi-annually).

The bond price at issue is: $$ P = \sum_{t=1}^{20} \frac{RM25}{(1 + 0.015)^t} + \frac{RM1,000}{(1 + 0.015)^{20}} $$

After calculating, the bond price per RM1,000 face value is RM1,085.30. For RM100 million worth of bonds, the market price at issue is RM108.53 million.

b

The new semi-annual market yield is \( r = \frac{7\%}{2} = 3.5\% \), and the remaining number of periods is \( n = 16 \) (8 years semi-annually).

The bond price today is: $$ P = \sum_{t=1}^{16} \frac{RM25}{(1 + 0.035)^t} + \frac{RM1,000}{(1 + 0.035)^{16}} $$

After calculating, the bond price per RM1,000 face value is RM871.20. For RM100 million worth of bonds, the market price today is RM87.12 million.

c

The price of the bond decreased from RM108.53 million to RM87.12 million due to an increase in the market yield to maturity from 3% to 7%.

This demonstrates the inverse relationship between bond prices and yields, and the concept of duration, which measures the sensitivity of a bond's price to changes in interest rates.