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Henning

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4

Help on Question on ROI and Bond Maturity

Hi,

Can you please guide me on how to approach and solve this problem?

Chen buys 1500 government bonds at the face value worth of $100 per bond at a 4% discount. Bond’s interest rate is 9% (not compounded) and is paid monthly, maturity is in 6 months. How much return (in % of initial investment) will Chen get after the maturity date of the bonds?

Many thanks

Hi,

Can you please guide me on how to approach and solve this problem?

Chen buys 1500 government bonds at the face value worth of $100 per bond at a 4% discount. Bond’s interest rate is 9% (not compounded) and is paid monthly, maturity is in 6 months. How much return (in % of initial investment) will Chen get after the maturity date of the bonds?

Many thanks

4 answers

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Book a coaching with Henning

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Well, you'll get 2 sources of income:

  • The face value at maturity: The ROI is 4/96 (as Chen bought the bonds at $96, but sells them at $100 in 6 months)
  • The interest payment: Chen gets 9% / 12 months * 6 months * $100 = $4.5 in interest payments. Again, the investment was $96

So the % return is $8.5 / $96, so around 9%.

Well, you'll get 2 sources of income:

  • The face value at maturity: The ROI is 4/96 (as Chen bought the bonds at $96, but sells them at $100 in 6 months)
  • The interest payment: Chen gets 9% / 12 months * 6 months * $100 = $4.5 in interest payments. Again, the investment was $96

So the % return is $8.5 / $96, so around 9%.

Thanks Henning! Do I need to add anything else to the 9%. The solution key shows 56.25% — Anonymous A on Nov 24, 2020

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Hi there,

It's great that you're using the Q&A, however I also highly advise you to start building your research/do-it-yourself skills! A quick google search gives you the literal formula for calculating the value of a bond.

I only say this because, when you enter the consulting world, you'll have to learn to research + figure out things like this on your own :)

https://www.google.com/search?q=bond+maturity+formula&rlz=1C1CHBF_en-GBAU880AU880&oq=bond+maturity+formula&aqs=chrome..69i57j0i22i30l7.2267j1j7&sourceid=chrome&ie=UTF-8

Hi there,

It's great that you're using the Q&A, however I also highly advise you to start building your research/do-it-yourself skills! A quick google search gives you the literal formula for calculating the value of a bond.

I only say this because, when you enter the consulting world, you'll have to learn to research + figure out things like this on your own :)

https://www.google.com/search?q=bond+maturity+formula&rlz=1C1CHBF_en-GBAU880AU880&oq=bond+maturity+formula&aqs=chrome..69i57j0i22i30l7.2267j1j7&sourceid=chrome&ie=UTF-8

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Hello!

Agree with Henning. However, you won´t get to those complications in an interview for consulting or MBB.

Best,

Clara

Hello!

Agree with Henning. However, you won´t get to those complications in an interview for consulting or MBB.

Best,

Clara

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