Question 1: Please determine the expected rate of return by using “Trial and Err

Question

Question 1:

Please determine the expected rate of return by using “Trial and Error.” You need two tables, PVIFA and PVIF, to look for the factor. Please provide a clear calculation and brief explanation.

Information as follow:

Company purchased bond with par value $1,000 that will mature in 10 Year and pay 5% interest annually. If the bond has market price for $1,175, what is the expected rate of return?

Question 2:

Please calculate the semi-annual Yield-to-maturity. Please provide a clear calculation and brief explanation.

Information as follows:

The bond with par value $1,000, and rate to maturity for 8%. Bond will sell for $890 with 5 years.

Question 3:

Please calculate the Value of Bonds. Please provide a clear calculation and brief explanation:

Bond has par value $1,000, 10% coupon rate, and pay semi-annually. Bond matures in 10 years.

Period                      Cash flow                         PVIF                           Discount Cash Flow

Question 4: (see page 93, Table 3-7)

The duration of a zero-coupon bond has par value $1,000, coupon rate 8%, and paid semi-annually and 6% yield.

Explanation / Answer

Answer: to the first question:

Let's determine the approx rate of return first =

[Annual coupon + {(Maturity amount - Current martket price)/No of years till maturity}]

{(Maturity amount - Current martket price)/2

= [$1000*5% + {(1,000 - 1175)/5}] / {(1,000 +1175)/2} = $15/$1,087.5 = 1.379%

Now we can use the trail and error method:

The discount factor at which the net present value of all the cashflow will turn zero is the required rate of return.

At 1.355%,the NPV is close to Zero. So that is the required rate of return.

@1.4% @1.355% Years Cashflows - In$ Discount factors Discounted CF Discount factors Discounted CF 0 -1175 1 -1175 1 -1175 1 50 0.986193294 49.30966469 0.986631148 49.33 2 50 0.972577213 48.62886065 0.973441022 48.67 3 50 0.959149125 47.95745626 0.960427233 48.02 4 50 0.945906435 47.29532175 0.947587423 47.38 5 1050 0.932846583 979.488912 0.934919267 981.67 -2.319784603 0.07

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

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