Suppose that the current interest rate is 8% and you purchased 5-year government bonds valued at $2000."
(a) Calculate the annual repayment to you at the end of each year.
(b) Calculate the Net Present Value [NPV] of the agreed cash flow (i.e. the interest payment from the Government) if the interest rate changes to 6.5% immediately after purchasing the Bonds. Repeat the method to calculate the Net Present Value [NPV] of the agreed cash flow (i.e. the interest payment from the Government) if the interest rate were to change to each of the following: 6.5%, 7%, 7.5%, 8%, 8.5%, 9%, 9.5%, 10%; [the original 8% is included for comparison]. Present the results in a suitable Table with proper headings.
(c) Calculate the Present Value of the bond which is due to be repaid at the end of the five-year lifetime. Comment on:
i. The relationship between interest rates and the attractiveness of bonds as an investment.
ii. The return from bonds when the interest does not change compared with investing the same amount at interest rates compounded annually.