| A client would like to invest in Bond A on 1st July 2017 with bond features as below: |
| Client Buying Price |
102% |
| Face Value |
US$100,000 |
| Coupon Rate / Payout Frequency / Payout Date |
5% p.a. / Once a Year / 31 December |
| Bond Tenor / Bond Maturity Date |
4.5 Years / 31 December 2021 |
|
| Purchase of Bond |
| Client Buying Bond at Bond Price of 102% |
US$100,000 x 102% = US$102,000 |
| 6-month Accrued Interest Paid to Seller |
US$100,000 x 5%p.a. x 6 / 12 = US$2,500 |
| Total Investment Amount Required |
US$102,000 + US$2,500
= US$104,500
|
|
| Case 1: Holding the Bond until Maturity |
| Client will receive coupon interest every year until maturity (i.e. 5 coupon payments in total during 2017 – 2021) and the bond face value on the maturity date. |
| Coupon Payment Received |
US$$100,000 x 5%p.a. x 5 (i.e. 5 years)
= US$25,000
|
| Bond Face Value upon Maturity |
US$100,000 |
| Total Receivable |
US$25,000 + US$100,000 = US$125,000 |
| Total Return |
US$125,000 – US$104,500
= US$20,500 |
|
| Case 2: Sell the Bond on 1st Oct 2018 (i.e. 1.25 years later) at the Bond Price of 105% |
| Client will receive funds from selling the bond with bond price of 105% plus the accrued interest paid by buyer for holding the bond for 9 months after previous coupon payment on 31 December 2017. |
| Client Selling Bond at Bond Price of 105% |
US$100,000 x 105% = US$105,000 |
| Coupon Payment Received by Client on 31 Dec 2017 |
US$100,000 x 5%p.a. = US$5,000 |
| Accrued Interest Received from Buyer |
US$100,000 x 5%p.a. x 9 / 12 = US$3,750 |
| Total Receivable |
US$105,000 + US$5,000 + US$3,750 = US$113,750 |
| Total Return |
US$113,750 – US$104,500
= US$9,250
|
|
| Case 3: Sell the Bond on 1st Oct 2018 (i.e. 1.25 years later) at the Bond Price of 94% |
| Client will receive funds from selling the bond with bond price of 94% plus the accrued interest paid by buyer for holding the bond for 9 months after previous coupon payment on 31 December 2017. |
| Client Selling Bond at Bond Price of 94% |
US$100,000 x 94% = US$94,000 |
| Coupon Payment Received by Client on 31 Dec 2017 |
US$100,000 x 5%p.a. = US$5,000 |
| Accrued Interest Received from Buyer |
US$100,000 x 5%p.a. x 9 /12 = US$3,750 |
| Total Receivable |
US$94,000 + US$5,000 + US$3,750 = US$102,750 |
| Total Return |
US$102,750 – US$104,500
= – US$1,750 (Loss)
|