A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to mat

ID: 1201532 • Letter: A

Question

A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for ________.

Your investment has a 40% chance of earning a 12% rate of return, a 50% chance of earning a 8% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?

You purchased a share of stock for $59. One year later you received $5.25 as dividend and sold the share for $58. Your holding-period return was _________.

An insurance company purchases corporate bonds in the secondary market with six years to maturity. Total par value is $55 million. The coupon rate is 11

percent, with annual interest payments. If the expected required rate of return in 4 years is 9 percent, what will the market value of the bonds be then?

Explanation / Answer

A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for ________.

Bond Value = INT [1 – (1/(1 + rd)N)]/rd + M * 1/(1 + rd)N

where: INT = the promised coupon payment

M = the promised face value

N = number of periods until the bond matures

rd = the market’s required return, YTM

Bond Value = 50 [ 1 – (1/(1+.08)5]/.08 + 1000 * 1/(1+.08)5

= 50 [ 1 – (1/(1.08)5]/.08 + 1000*1/(1.08)5

= 50 [ 1 – (1/1.46)]/0.8 + 1000*1/1.46

= 50 [1- 0.68]/0.8 + 1000*0.68

= 50 * 0.39 + 680

= 699.5

Your investment has a 40% chance of earning a 12% rate of return, a 50% chance of earning a 8% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?

Probability

Earning

Deviation from the mean

Deviation from the mean square

40%

6.33

40.11111111

50%

8.00

10%

-3

-3.00

Sum

11.33333333

113.1111111

Average return

5.666667

Variance

56.55555556

Standard Deviation

7.520342782

You purchased a share of stock for $59. One year later you received $5.25 as dividend and sold the share for $58. Your holding period return was _________.

Holding Period = (ending price – initial price + income) / initial price

=(58 – 59 + 5.25)/ 59

= 4.25/ 59

= 0.0723

= 7.23%

An insurance company purchases corporate bonds in the secondary market with six years to maturity. Total par value is $55 million. The coupon rate is 11 Percent, with annual interest payments. If the expected required rate of return in 4 years is 9 percent, what will the market value of the bonds be then?

Price of the bond = 11% * 55000000* (1- (1+0.09)-4)/0.09 + 55000000/ (1+ 0.09)4

$58,563,691.86