courses.aplia.com PLUS Aplia: Student Ques Each bond has 10 years until maturity

Question

courses.aplia.com PLUS Aplia: Student Ques Each bond has 10 years until maturity and has the same risk. Their yield to maturity (YTH) is 9%. Interest rates are assumed to remain constant over the next 10 years. Label the curves on the following graph to indicate the path that each bond's price, or value, is expected to follow. BOND VALUE IS 1200 Johnson 1100 Smith. 1000 900 Irwin 800 700 600 10 20 YEARS TO MATURITY Based on the preceding information, which of the following statements are true? Check all that apply. Johnson's bonds have the highest expected total return. The expected capital gains yield for Smith's bonds is greater than 12%. The bonds have the same expected total return. The expected capital gains yield for Smith's bonds is negative. btd slstantsa teding volume in the pst few ars t onde roueret Irwin's bonds have exhibited a new issue seasoned issue Flash Player MAC 27.00,18 3.341 2004-2016 Aplo. All righes reserved 2013Cengage Learing except noted. All rigts reserved

Explanation / Answer

1. Calculation of Annual Interest payment of bonds.

YTM = [C + (F-P) / n] / [(F+P)/2]

Where C= Interest Payment, F = Face Value, P = Current Price

Johnson Bonds:

9% = [C + (1000 - 1,200)/10] / [(1000 + 1200)/2]

9% = [C - 20] / 1100

C = $119

Smith Bonds:

9% = [C + (1000 - 1,000)/10] / [(1000 + 1000)/2]

9% = C / 1000

$90 = C

Irwin Bonds:

9% = [C + (1000 - 800)/10] / [(800 + 1000)/2]

9% = [C + 20] / 900

$61 = C

Capital Gains of Smith's Bonds = 1000 - 800 / 800 x 100 = 25%

Correct answer is B.

Expected return on three bonds:

Johnson = [119 x 10 + (1000 - 1200)] / 1200 = 82.5%

Smiths = [900 + (1000 - 1000)] / 1000 = 90%

Irwin = [61 x 10 + (1000 - 800)] / 800 = 101.25%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.