1. a.) A zero-coupon bond has a face value of $120.00 and matures in 2 years. The rate of return on equally risky assets is 5% (.05). What will its price be today? Suppose you sell it next year when the rate of return on equally risky assets is 7% (.07). What rate of return did you earn holding the asset for a year? Todays price:

1. a.) A zero-coupon bond has a face value of $120.00 and matures in 2 years. The rate of return on equally risky assets is 5% (.05). What will its price be today? Suppose you sell it next year when the rate of return on equally risky assets is 7% (.07). What rate of return did you earn holding the asset for a year? Todays price:

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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I need assistance with the following: Suppose you have bough the above zero-coupon bond, with value and duration equal to your obligation. Now suppose the rates immediately increase to 9%. What happens to your net position? How much is the tuition obligation? How much is the zero-coupon bond? How much is the net position?
Suppose you are interested in buying a 1.5% semi-annual coupon treasury bond maturing in exactly 10 years. You think appropriate discount rate for this bond (aka yield to maturity or YTM) is 3%. How much should you pay for this bond if its par value is $1,000?
Assume you can buy a bond that has a par value of $1000, matures in 10 years, yielding 6% and has a duration of 5. If you would like to use this bond to form a guaranteed investment contract “GIC” and offer a guaranteed rate of return to investors for certain years. a. what is the maximum yield you can offer? Why? Explain. b. For how many years would you make the guarantee? Explain.
What is the price of a bond with a coupon rate of 4% making semi-annual payments with a face value of $1,000 that matures in 10 years when a. the YTM on the bond is 8.6%? B. the Y IM Is 6.6%? C. the YTM is 5.0%? d. What is the relationship between YTM and price?
1. You buy a 6 year bond with an annual 5% coupon at par value, $1000. If the yield to maturity at the end of the first year changes to 3% what is the end of the year value of the bond(after the coupon payment, remember: bond value does not include this coupon)? 2. Calculate the value of a 6 year 2% coupon bond with semiannual payments, 1000 par. Expected return is the risk free rate of 3%. 3. Price a 5 year 4% semiannual coupon bond if the yield to maturity is 6% (write the price as if par is 100, use 5 decimal places)
Suppose that you bought a 14% Drexler bond with time to maturity of 9 years for $1,379.75 (semiannual coupons, interest rate=8%). After another ½ year, you sold the bond. Assuming that the required rate of return remained at 8%, what would the selling price be? What is the rate of return from this investment? If the interest rate dropped by 25 basis points, what would the selling price be? What would the rate of return from this investment be?
You plan to buy an 8% coupon 8-year maturity bond when market rate of return of similar bond is 10%. a) Calculate the proper price for this bond. b) TWO years later, the market rate has changed to 9% and the price of your bond has also changed accordingly. If you sell this bond at the market price, what is the ANNUAL rate of return from your investment in this bond? c) What will be your real rate of return over the two years if inflation rate is 3% in the first year and 5% in the second?
You just bought a bond (M=$1000, CR=10%, n=20 years, semiannual coupon pay yielding 10.5%. If you sell the bond one year from today when the yield is 9.75%, what would be your realized (actual) rate of return (before-tax)? 16.996%
How much would you pay for a zero coupon bond with a par value of $1000, a maturity of 21 years, if your required rate of return is 6.1%? Assume annual discounting. (Round your answer to the nearest penny.)
Assume that the Pure Expectations Theory of the term structure is correct. Also assume that the interest rate today on a 9-year security is 6.40%, while the interest rate today on a 15-year security is 8.00%. Finally assume that the interest rate on a 3-year security to be bought at Year 9 and held over Years 10, 11, and 12 is 6.80%. Given this information, determine the average annual return that investors today must expect that they will receive from investing in a 3-year security in 12 Years (that is, buying the security at Year 12 and holding it over Years 13, 14, and 15). O 13.00% O 12.50% 13.50% O 12.00% O 14.00%
4. Let R be the one-year LIBOR rate with annual compounding that will be determined in 6 years from now. Assume the forward interest rate volatility for the corresponding period is 20% per year. The risk-free rates with annual compounding are currently 5% for all maturities. a. Calculate the price of a financial derivative that pays 1000R € in 6 years from now. b. Calculate the price of a financial derivative that pays 1000R € in 7 years from now.
Suppose you purchased a 20-year U.S. treasury bond with a 6% annual coupon ten years ago at par, but coupon payments are made semi-annually. Today the bond's yield to maturity has risen to 8% a. If you hold the bond until maturity, what is the yield that you will earn on your investment? b. If you sell the bond now, what will be the price at which you sell the bond? c. If you sell the bond now, what annual return (yield) that you have made on this bond?

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