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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As a sell - side analyst you are following a bond. A client asks you to value a corporate bond with 10 annual coupon payments of £85. The face value of this bond, £1500, will be repaid by the Corporation at the end of 10 years. You are asked to put a value on a bond which promises 10 annual coupon payments of £85 and will repay its face value of £1500 at the end of 10 years. As part of your market research, you discover bonds of similar class with yield to maturity of 11 % . a. Using the above information, calculate the worth of the bond. b. If the Corporation offers you a price of £1545.70 for the bond, calculate its yield to maturity.

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