Assume you have a one-year investment horizon and are trying to choose among thr
ID: 2651252 • 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)Current price of Zero coupon bond :In zero coupon bond there is no coupon payments during the life of bond.
=PVF@7.1% ,9 years *Redemption value
=.53938*1000
=539.38
2a Price of second bond =( PVAF@7.1%,9years *Interest)+( PVF @7.1%,9 years *redemption value)
= (6.4876*71 ) +( .53938 *1000)
=460.62 +539.38
=1000
**Redemption value = 71/7.1 % = 1000
3a)Price of third bond = PVAF@ 7.1%,9 years *Interest +PVF@7.1% ,9 years * redemption value
=(6.4876*91)+ (.53938*1000)
= 590.37 +539.38
= 1129.75
**Redemption value = Coupon per year /Coupon rate
= 91 /9.1 % = 1000
b-1)
Price of zero coupon bond one year from now = PVF@7.1% ,8years *Redemption value
= .57768*1000
= 577.68
price of second bond =(PVAF@7.1%,8years*interest ) +(PVF@7.1%,8years*redemption value)
= ( 5.9482* 71) + ( .57768*1000)
= 422.32 +577.68
=1000
price of third bond = (PVAF@7.1%,8years *interest) +(PVF@7.1%,8years *redemption value)
= (5.9482 *91) +( .57768 *1000)
= 541.29 +577.68
=1118.97
b-2)
One year holding return(Rate of return)
Total return*100/Price today
Zero coupon 7.1% coupon 9.1%coupon Price today (A) 539.38 1000 1129.75 Price one year from now(B) 577.68 1000 1118.97 Price Increase C= (B-A) 38.30 0 (10.78) coupon D 0 71 91 Total return (C+D) 38.30 71 80.22One year holding return(Rate of return)
Total return*100/Price today
7.10% 7.10% 7.10%Related Questions
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