2.3 You have been provided with the following options. a. A 10-year, R1000 face value, 10 percent coupon bond with semiannual interest payments. b. A 10-year, R1000 face value, 10 percent coupon bond with annual interest payments. c. A 10-year, R1000 face value, zero coupon bond. d. A 10-year R100 annuity. Determine which one poses the highest price risk. 2.4 Which of these five statement is the most correct: a. Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. b. Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. c. Reinvestment rate risk is worse from a typical investor's standpoint than interest rate risk. d. If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium over its R1 000 par value. e. If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a discount below its R1 000 par value. 2.5 Marie Snell recently inherited some bonds (face value R100 000) from her father, and soon thereafter she became engaged to Sam Spade, a University of Florida marketing graduate. Sam wants Marie to cash in the bonds so the two of them can use the money to "live like royalty" for two years in Monte Carlo. The 2 percent annual coupon bonds mature on January 1, 2024, and it is now January 1, 2004. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent. If Marie sells her bonds now and puts the proceeds into an account which pays 10 percent compounded annually, what would be the largest equal annual amounts she could withdraw for two years, beginning today?
2.3 You have been provided with the following options. a. A 10-year, R1000 face value, 10 percent coupon bond with semiannual interest payments. b. A 10-year, R1000 face value, 10 percent coupon bond with annual interest payments. c. A 10-year, R1000 face value, zero coupon bond. d. A 10-year R100 annuity. Determine which one poses the highest price risk. 2.4 Which of these five statement is the most correct: a. Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. b. Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. c. Reinvestment rate risk is worse from a typical investor's standpoint than interest rate risk. d. If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium over its R1 000 par value. e. If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a discount below its R1 000 par value. 2.5 Marie Snell recently inherited some bonds (face value R100 000) from her father, and soon thereafter she became engaged to Sam Spade, a University of Florida marketing graduate. Sam wants Marie to cash in the bonds so the two of them can use the money to "live like royalty" for two years in Monte Carlo. The 2 percent annual coupon bonds mature on January 1, 2024, and it is now January 1, 2004. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent. If Marie sells her bonds now and puts the proceeds into an account which pays 10 percent compounded annually, what would be the largest equal annual amounts she could withdraw for two years, beginning today?
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
Related questions
Question
Transcribed Image Text:2.3
You have been provided with the following options.
a. A 10-year, R1000 face value, 10 percent coupon bond with semiannual interest
payments.
b. A 10-year, R1000 face value, 10 percent coupon bond with annual interest
payments.
c. A 10-year, R1000 face value, zero coupon bond.
d. A 10-year R100 annuity.
Determine which one poses the highest price risk.
2.4
Which of these five statement is the most correct:
a. Other things held constant, a callable bond would have a lower required rate of
return than a noncallable bond.
b. Other things held constant, a corporation would rather issue noncallable bonds than
callable bonds.
c. Reinvestment rate risk is worse from a typical investor's standpoint than interest
rate risk.
d. If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave
investors a 10 percent rate of return, and if interest rates then dropped to the point
where rd = YTM = 5%, we could be sure that the bond would sell at a premium over
its R1 000 par value.
e. If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave
investors a 10 percent rate of return, and if interest rates then dropped to the point
where rd = YTM = 5%, we could be sure that the bond would sell at a discount below
its R1 000 par value.
2.5
Marie Snell recently inherited some bonds (face value R100 000) from her
father, and soon thereafter she became engaged to Sam Spade, a University of
Florida marketing graduate. Sam wants Marie to cash in the bonds so the two of
them can use the money to "live like royalty" for two years in Monte Carlo. The 2
percent annual coupon bonds mature on January 1, 2024, and it is now January 1,
2004. Interest on these bonds is paid annually on December 31 of each year,
and new annual coupon bonds with similar risk and maturity are currently yielding
12 percent. If Marie sells her bonds now and puts the proceeds into an account
which pays 10 percent compounded annually, what would be the largest equal
annual amounts she could withdraw for two years, beginning today?
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