You are advising a client with two bond investments. Bond A is a zero coupon wit

Question

You are advising a client with two bond investments. Bond A is a zero coupon with face value 1000 maturing in 8 years . Its current price is 676.84. Bond B has an annual coupon rate 6% and semiannual interest payments. It also has a face value 1000 and mature in 8 years. Bond B ha market value 939.53. Your client will hold one of the bond for 5 years A- yield to maturity for bond A is 5%. Compute yield to maturity for bond B.
B-you require a 6.4%. Annual rate of return to invest in bond B. What is the maximum amount you'd be willing to pay for this bond? C- after 5 years you expect the price of bond A to be 813.50, providing yield of 3.74%. Bond B expected market value in 5 years is 950.44. Compute the realized yield for bond B over the 5 years holding period. Which bond is better
You are advising a client with two bond investments. Bond A is a zero coupon with face value 1000 maturing in 8 years . Its current price is 676.84. Bond B has an annual coupon rate 6% and semiannual interest payments. It also has a face value 1000 and mature in 8 years. Bond B ha market value 939.53. Your client will hold one of the bond for 5 years A- yield to maturity for bond A is 5%. Compute yield to maturity for bond B.
B-you require a 6.4%. Annual rate of return to invest in bond B. What is the maximum amount you'd be willing to pay for this bond? C- after 5 years you expect the price of bond A to be 813.50, providing yield of 3.74%. Bond B expected market value in 5 years is 950.44. Compute the realized yield for bond B over the 5 years holding period. Which bond is better
A- yield to maturity for bond A is 5%. Compute yield to maturity for bond B.
B-you require a 6.4%. Annual rate of return to invest in bond B. What is the maximum amount you'd be willing to pay for this bond? C- after 5 years you expect the price of bond A to be 813.50, providing yield of 3.74%. Bond B expected market value in 5 years is 950.44. Compute the realized yield for bond B over the 5 years holding period. Which bond is better
B-you require a 6.4%. Annual rate of return to invest in bond B. What is the maximum amount you'd be willing to pay for this bond? C- after 5 years you expect the price of bond A to be 813.50, providing yield of 3.74%. Bond B expected market value in 5 years is 950.44. Compute the realized yield for bond B over the 5 years holding period. Which bond is better

Explanation / Answer

a.The YTM for bond B =rate(nper,pmt,pv,fv) in excel where nper = 8*2 = 16 , pmt = 60/2 = 30, pv = 939.53 and fv =1000

So semi-annual YTM = rate(16,30,-939.53,1000) = 3.50%

So annual YTM = 3.50*2 = 7.00%

b. Let us assume X be the investment in B and (1-X) be the investment in A

X*7 + (1-X)*5 = 6.4

7X + 5-5X = 6.4

2X = 1.4

X=0.7

So you would invest 0.7 or 70% of your money in bond B and 30% in bond A

The maximum price you pay, is the market parice of bond B = 939.53

c. Bond A: realized yield = (813.50-676.84)/676.84 = 0.2019 = 20.19%

Bond B: Realinzed yield = 950.44 -939.53 + 60*5 = 310.91/939.53 = 33.09%

Bond B is better as it has a higher return.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

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