Calculate the price of the Bond? (98th)

 

Calculate the price of the Bond? Or compute the price of a 10% coupon bond with 12 years of maturity and par value of TK. 100,000.00 if the required yield is 12% .

When No. of years = 12 years

We know that

Given YTM=12%  so r = .12 coupon rate = 10%=.10 no of periods n = 12 years

FV par value = 100000.00 So c= 100000*.10 = 10000.00

=C×(1-(1+r)^(-n))/r+FV/(1+r)^n

pv=10000×(1-(1+.12)^(-12))/(.12)+ 100000/(1+.12)^12

=61944.1642+25667.35

=87611.5142

So the price of the bond is TK. 87611.5142

 

 pv=C×(1-(1+r)^(-n))/r+FV/(1+r)

PV= Present Value (Bond Price)

C = Periodic coupon payment

                                                           = Coupon rate * FV/ No of coupon payments in a year

FV= Face/Par value of the bond

r = Yield to maturity (YTM)

n= No of periods till maturity

 

Difference between Discount Yield and Bond Equivalent Yield. Which yield is used for Treasury Bond quotes in Bangladesh?

 The Discount Yield and Bond Equivalent Yield are two different methods for calculating and expressing the yield on fixed-income securities. The yield used for Treasury Bond quotes in Bangladesh is the Discount Yield. Here is a comparison of these two yield measures:

1.      Discount Yield:

   Calculation: The discount yield is calculated based on the discount between the purchase price of the security and its face value, expressed as a percentage of face value.

 

      Formula: Discount Yield = (Discount/Face Value)*(360/Days of Maturity)

   Interpretation: The discount yield represents the annualized yield on a Treasury Bond, assuming the investor holds the bond until maturity and does not receive any periodic coupon payments. It reflects the percentage return earned on the investment.

 

2.      Bond Equivalent Yield:

        Calculation: The bond equivalent yield is calculated by doubling the semi-annual yield of a bond

 

           Formula: Bond Equivalent Yield = Semi-annual Yield*2

         Interpretation: The bond equivalent is an annualized yield that considers the semi-annual coupon payments of a bond. It allows for easier comparison of yields between bonds with different payment frequencies.

For Treasury Bond quotes in Bangladesh, the Discount Yield is commonly used. The quoted yield represents the annualized discount yield, providing investors with a measure of the expected return on the Treasury Bond. This yield calculation is widely used for fixed-income securities, including government bonds, and allows for standardized pricing and comparison among different bond offerings.

It’s important to note that the specific market conventions and practices may vary between countries and markets. While the Discount Yield is generally used for Treasury Bond quotes in Bangladesh, it is always recommended to refer to the relevant guidelines, market practices, and official sources to ensure accurate and up-to-date information regarding Treasury Bond quotes and yield calculations in Bangladesh.

Difference between Spot rate and Forward rate

 

Aspect	Spot Rates	Forward Rates
Timing	Immediate delivery and settlement	Agreed upon today, settlement at a future date
Settlement	Settled “on the spot” (without two days)	Settled at a future date specified in the contract
Price	Current market price	Agreed upon price based on market expectations
Purpose	Immediate currency exchange	Hedging against future currency fluctuations
Rate Determination	Supply and demand in the spot market	Interest rate differentials and market expectations
Interest rate	Not influenced by interest rate differentials	Influenced by interest rate differentials
Exchange rate stability	Subject to immediate market fluctuations	Provides certainty against future rate movements
Liquidity	High liquidity due to immediate settlement	May have lower liquidity depending on the term
Market Participants	Speculators, travelers, short-term traders	Importers, exporters, long-term investors

TT Clean Rate and BC Rate

 

	TT Clean Rate	BC Rate
1	TT stands for Telegraphic Transfer	BC stands for Buying Currency Rate
2	Represents the exchange rate for electronic or wire transfers	Represents the rate at which a bank buys foreign currency
3	Used for international fund transfers and foreign currency transactions	Used for foreign exchange transactions particularly when purchasing foreign currency
4	Typically offered to individuals or businesses for money transfers	Typically used by banks or financial institutions for buying foreign currency
5	Reflects the market value of the currency pair at the time of transfer	Reflects the rate at which a bank acquires foreign currency from the market
6	Often involves services charges or fees for the transfer	May involve commissions or fees charged by the bank for the foreign currency purchase
7	Rates may vary depending on the transfer amount and destination	Rates may vary based on the volume of the foreign currency being bought and sold
8	Generally used for remittances international trade, or personal transfer	Primarily used by bank for their own foreign exchange activities
9	TT clean rates are more commonly quoted in financial markets	BC rates are used internally by banks and may not be readily available to the public.

Difference Between Caps and Collars

 

	Caps	Collars
1	Sets and upper limit on a variable (e.g. exchange rate)	Sets both upper and lower limit on a variable
2	Provides protection against unfavorable price movements	Provides, Protection against both unfavorable and favorable price movements
3	Limits the maximum exposure to risk	Limits both the maximum exposure to risk and potential gains.
4	Used by importers or buyers to manage currency risk	Used by both importers and exporters to manage currency risk
5	Provides a guarantee against excessive costs	Provides a range of acceptable costs, ensuring flexibility within defined limits
6	Does not allow for gains beyond the specified cap	Limits gains to defined range, preventing excessive profits
7	Offers a more conservative approach to risk management	Offers a moderate approach to risk management balancing risk and potential gains.
8	Commonly used in volatile or uncertain markets	Commonly used in markets where moderate fluctuations are expected
9	May involve a premium payment to secure the cap	May involve additional costs for setting both upper and lower limits

These differences highlight the contrasting features and applications of caps and collars in managing currency risk in foreign trade. Caps provide a ceiling to limit risk exposure, while collars offer a range of acceptable costs to balance risk and potential gains. 

Describes Direct and Indirect Quotation in respect of foreign exchange trade

 In foreign exchange trading, direct quotation refers to the value of a currency quoted in terms of another currency, where the domestic currency is the base currency and the foreign currency is the quote currency. For example, a direct quote for the US dollar against the Euro would be “1 USD=.085 EUR”. This Means that one US dollar is worth 0.85 Euros.

 

On the other hand, indirect quotation is when the value of a currency is quoted in terms of the domestic currency, and foreign currency is the base currency. For example, an indirect quote for the US dollar against the Euro would be “1 EUR= =1.18 USD”. This means that one Euro’s worth 1.18 US dollars.

Here are the nine differences between direct quotation and indirect quotation methods in the context of foreign exchange:

	Direct Quotation	Indirect Quotation
1	Displays the domestic currency per unit of foreign currency	Shows the foreign currency per unit of domestic currency .
2	Used in countries where the domestic currency is the base currency	Utilized in countries where the foreign currency is the base currency
3	Example: 1 USD=0.85 EUR	Example: 1EUR=1.18 USD
4	More commonly used in the Unites States	More commonly used in the Eurozone
5	Used by domestic businesses and individuals to calculate the cost of foreign goods or services.	Employed by foreign business and individuals to determine the value of domestic goods or services.
6	Often used in international trade transactions and currency conversions.	Often used by tourists or travelers in foreign countries.
7	Reflects the strength or weakness of the domestic currency.	Reflects the strength or weakness of the foreign currency
8	Can provide a direct comparison of the exchange rates between two currencies	Requires additional calculations to determine the exchange rate between two currencies.
9	Used by financial institutions for currency trading and hedging purposes.	Used for informational purposes or for converting currencies for personal use.

 

These differences, highlight the contrasting characteristics and applications of direct and indirect quotation methods.

Direct and indirect quotations are important in foreign exchange trading because they affect the calculation of exchange rates and can impact the profitability of trades. Traders must be aware of whether a quote is direct or indirect and understand how to use them to make informed trading decisions.