Assume you have a one-year investment horizon and are trying to choose among thr
ID: 2646419 • Letter: A
Question
Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 9 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 7.4% coupon rate and pays the $74 coupon once per year. The third has a 9.4% coupon rate and pays the $94 coupon once per year.
If all three bonds are now priced to yield 7.4% to maturity, what are their prices? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
If you expect their yields to maturity to be 7.4% at the beginning of next year, what will their prices be then? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
What is your rate of return on each bond during the one-year holding period? (Do not round intermediate calculations.Round your answers to 2 decimal places.)
Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 9 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 7.4% coupon rate and pays the $74 coupon once per year. The third has a 9.4% coupon rate and pays the $94 coupon once per year.
Explanation / Answer
If all three bonds are now priced to yield 7.4% to maturity, what are their prices? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
zero-coupon bond
Current prices = 1000/(1+7.4%)^9
Current prices = $ 525.97
7.4% coupon bond
Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the period) = 9
PV (indicates the price) = ?
PMT (indicate the annual payment) = 74
FV (indicates the face value) = 1000
Rate (indicates YTM) = 7.4%
Bond Value = pv( 7.4%,9,74,1000)
Bond Value = $ 1000
9.4% coupon bond
Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the period) = 9
PV (indicates the price) = ?
PMT (indicate the annual payment) = 94
FV (indicates the face value) = 1000
Rate (indicates YTM) = 7.4%
Bond Value = pv( 7.4%,9,94,1000)
Bond Value = $ 1128.12
If you expect their yields to maturity to be 7.4% at the beginning of next year, what will their prices be then? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
zero-coupon bond
Price one year from now = 1000/(1+7.4%)^8
Price one year from now = $ 564.89
7.4% coupon bond
Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the period) = 8
PV (indicates the price) = ?
PMT (indicate the annual payment) = 74
FV (indicates the face value) = 1000
Rate (indicates YTM) = 7.4%
Bond Value = pv( 7.4%,8,74,1000)
Bond Value = $ 1000
9.4% coupon bond
Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the period) = 8
PV (indicates the price) = ?
PMT (indicate the annual payment) = 94
FV (indicates the face value) = 1000
Rate (indicates YTM) = 7.4%
Bond Value = pv( 7.4%,8,94,1000)
Bond Value = $ 1117.60
What is your rate of return on each bond during the one-year holding period? (Do not round intermediate calculations.Round your answers to 2 decimal places.)
In all the three Rate of return would be equal to YTM if there is no change in any component
a.If all three bonds are now priced to yield 7.4% to maturity, what are their prices? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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