ssume you have a one-year investment horizon and are trying to choose among thre
ID: 2711793 • Letter: S
Question
ssume 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 8 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 7.9% coupon rate and pays the $79 coupon once per year. The third has a 9.9% coupon rate and pays the $99 coupon once per year.
If all three bonds are now priced to yield 7.9% 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 7.9% 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.)
ssume 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 8 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 7.9% coupon rate and pays the $79 coupon once per year. The third has a 9.9% coupon rate and pays the $99 coupon once per year.
Explanation / Answer
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 8 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 7.9% coupon rate and pays the $79 coupon once per year. The third has a 9.9% coupon rate and pays the $99 coupon once per year.
a) If all three bonds are now priced to yield 7.9% to maturity, what are their prices? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Zero
Current prices = Maturity Value/(1+r)^n
Current prices = 1000/(1+7.9%)^8
Current prices = $ 544.29
7.9% Coupon
Since Coupon is equal to yields to maturity then
Current prices = Face Value
Current prices = $ 1000
9.9% Coupon
Current prices = pv(rate, nper,pmt,fv)
Nper (indicates the period) = 8
PV (indicates the price) = ?
PMT (indicate the annual payment) = 1000*9.9% = 99
FV (indicates the face value) = 1000
Rate (indicates YTM) = 7.9%
Current prices = pv( 7.9%,8,99,1000)
Current prices = $ 1115.37
b - 1 If you expect their yields to maturity to be 7.9% 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
Price one year from now = Maturity Value/(1+r)^n
Price one year from now = 1000/(1+7.9%)^7
Price one year from now = $ 587.29
7.9% Coupon
Since Coupon is equal to yields to maturity then
Price one year from now = Face Value
Price one year from now = $ 1000
9.9% Coupon
Price one year from now = pv(rate, nper,pmt,fv)
Nper (indicates the period) = 7
PV (indicates the price) = ?
PMT (indicate the annual payment) = 1000*9.9% = 99
FV (indicates the face value) = 1000
Rate (indicates YTM) = 7.9%
Price one year from now = pv( 7.9%,7,99,1000)
Price one year from now = $ 1104.48
b-2.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.)
If YTM does not change than Rate of Return is equal to YTM i.e 7.9%
For Verification
Zero
Rate of Return = (Price one year from now - Current Price)/Current Price
Rate of Return = (587.29-544.29)/544.29
Rate of Return = 7.90%
7.9% Coupon
Rate of Return = (Price one year from now - Current Price+ Coupon)/Current Price
Rate of Return = (1000-1000+79)/1000
Rate of Return = 7.90%
9.9% Coupon
Rate of Return = (Price one year from now - Current Price+ Coupon)/Current Price
Rate of Return = (1104.48-1115.37+99)/1115.37
Rate of Return = 7.90%
Answer
Zero 7.9% Coupon 9.9% Coupon Rate of return 7.90% 7.90% 7.90%Related Questions
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