Help on Question on ROI and Bond Maturity

Bain BCG Mck quantitative
New answer on Dec 30, 2020
4 Answers
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Anonymous A asked on Nov 24, 2020

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

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Henning
Expert
replied on Nov 24, 2020
Bain | passed >15 MBB interviews as a candidate

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%.

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Anonymous A on Nov 24, 2020

Thanks Henning! Do I need to add anything else to the 9%. The solution key shows 56.25%

Ian
Expert
Content Creator
replied on Nov 24, 2020
MBB | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

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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Antonello
Expert
Content Creator
replied on Dec 30, 2020
McKinsey | MBA professor for consulting interviews

Hi, in addition to the solutions proposed by the other coaches in the discussion, I would like to suggest similar cases in the platform to practice with:

  • https://www.preplounge.com/en/consulting-forum/how-much-would-you-charge-to-clean-all-the-windows-in-seattle-4965
  • https://www.preplounge.com/en/consulting-forum/market-sizing-milk-consumption-5087
  • https://www.preplounge.com/en/consulting-forum/how-would-you-calculate-the-value-of-a-cow-4982
  • https://www.preplounge.com/en/consulting-forum/estimate-number-of-traffic-lights-in-a-london-5692

Hope it helps,
Antonello

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Clara
Expert
Content Creator
replied on Nov 26, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

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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Henning gave the best answer

Henning

Bain | passed >15 MBB interviews as a candidate
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