Question

2 years have passed and you decide to sell the bonds on the secondary market. Another investment fund, Eastern Cross Securities, wishes to buy your bonds and they have a YTM of 5% p.a. for the coupon bond and 3% for the zero coupon bond. Eastern Cross will pay for your coupon bonds and for zero coupon bonds. (hint: 2 years have passed on a 5 year maturity for the bonds, how many years remain and how does this affect n in the valuation?)

Answer 1

The value of the bonds on the secondary market depends on the yield to maturity (YTM) offered by the buyer. The remaining years to maturity affect the calculation of the present value of the bonds.

Step-by-step explanation:

When selling the bonds on the secondary market, the value of the bonds will depend on the yield to maturity (YTM) offered by the buyer. For the coupon bond with a YTM of 5% p.a., the value can be calculated using the present value formula. The remaining years to maturity will be 3 years (original 5 years - 2 years passed). The value of the bond can be calculated by discounting the future cash flows (interest payments and principal) at the YTM of 5% for 3 years. For the zero coupon bond with a YTM of 3%, the value can be calculated similarly.