1. To help financing its green projects, a UK based company is issuing a number of new bonds. These bonds have a face value of £1,000, 10% coupon rate and 5-year maturity. Assume that you can borrow from the risk-free market at the rate of 3% and that the current short rate is 5% but it is expected to be 4%, 5%, and 6% with probability 0.3, 0.4 and 0.3, respectively. Compute possible values of the bonds. Also, compute possible values of the bonds if they are inflation protected. Assume that inflation rate is 1% a year.

1. To help financing its green projects, a UK based company is issuing a number of new bonds. These bonds have a face value of £1,000, 10% coupon rate and 5-year maturity. Assume that you can borrow from the risk-free market at the rate of 3% and that the current short rate is 5% but it is expected to be 4%, 5%, and 6% with probability 0.3, 0.4 and 0.3, respectively. Compute possible values of the bonds. Also, compute possible values of the bonds if they are inflation protected. Assume that inflation rate is 1% a year.

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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Concept explainers

Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.

Question

1. To help financing its green projects, a UK based company is issuing a number
of new bonds. These bonds have a face value of £1,000, 10% coupon rate and
5-year maturity. Assume that you can borrow from the risk-free market at the
rate of 3% and that the current short rate is 5% but it is expected to be 4%, 5%,
and 6% with probability 0.3, 0.4 and 0.3, respectively. Compute possible values
of the bonds. Also, compute possible values of the bonds if they are inflation
protected. Assume that inflation rate is 1% a year.

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