SHOW WORK & FORMULA !!! Question A vestor decides to purchase some zero coupon b
ID: 2790715 • Letter: S
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SHOW WORK & FORMULA !!!
Question A vestor decides to purchase some zero coupon bonds B1, B2 in such a way that after 3 years the value of the portfolio is $100,000. Bi is a ZCB that matures in 4 years and is priced to return 3.2% per year. B2 is a ZCB that matures in 3 years and is priced to yield 24% per year How much does she invest now if she wants a 2.8% annual rate of return? (ii) If she invests $ Vi in B1 and $ ½ in B2, write down the equations that li.½ must satisfy. (iii) Solve the equations you obtained in (11) for li.½. iv) What price does she pay for each of the bonds and what integer) number of each bond should she buy to approximately satisy her requirements?Explanation / Answer
1 To have the value of the portfolio to be $ 100000(a single sum) in 3 yrs. now, she should invest FV=PV*(1+r)^n 100000=PV*(1+0.028)^3 so, PV or the current investment =100000/1.028^3= 92049.34 2 Now, FV of B1=V1*1.032^3 FV of B2=(92049.34-V1)*1.024^3 3 V1*1.032^3+((92049.34-V1)*1.024^3)=100000 V1= 45845 So, value invested in B1 =45845 Value invested in B2=92049-45845=46204 4. Price of B1 ZCB= 45845 Price of B2 ZCB= 46204 No.of $ 1000 Face Value ZCBs she should buy will be B1---- 46 & B2---- 47
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