Assume you have a one-year investment horizon and are trying to choose among thr
ID: 2651254 • 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 7.1% coupon rate and pays the $71 coupon once per year. The third has a 9.1% coupon rate and pays the $91 coupon once per year.
If all three bonds are now priced to yield 7.1% 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 7.1% 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 7.1% coupon rate and pays the $71 coupon once per year. The third has a 9.1% coupon rate and pays the $91 coupon once per year.
Explanation / Answer
(a)
Zero coupon
7.1% coupon
9.1% coupon
Current prices
$463.19
$1,000.00
$1,134.20
( b - 1 & 2)
Zero coupon
7.1% coupon
9.1% coupon
Price one year from now
$500.25
$1,000.00
$1,124.94
Price Increase
$37.06
$0.00
-$9.26
Coupon income
$0.00
$71
$91
Pre-tax income
$37.06
$71
$81.74
Pre-tax rate of return
7.1 %
7.1 %
7.1 %
Taxes
$11.12
$24.00
$28.15
After-tax income
$25.94
$47.00
$53.59
After – tax return
5.6 %
5.6 %
5.52 %
Zero coupon
7.1% coupon
9.1% coupon
Current prices
$463.19
$1,000.00
$1,134.20
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.