7. Valuing semiannual coupon bondsBonds often pay a coupon twice a year. For the valuation of bonds that make semiannual payments, the number of periods doubles, whereas theamount of cash flow decreases by half. Using the values of cash flows and number of periods, the valuation model is adjusted accordingly.Assume that a $1,000,000 par value, semiannual coupon US Treasury note with four years to maturity has a coupon rate of 3%. The yield to maturity(YTM) of the bond is 11.00%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note:$895,940.83$746,617.36$634,624.76$470,368.94Based on your calculations and understanding of semiannual coupon bonds, complete the following statement:When valuing a semiannual coupon bond, the time period variable(N) used to calculate the price of a bond reflects the number ofperiods remaining in the bond's life.

Treasury Notes are issued by federal government that represents government debt raised through…

Answered: 7. Valuing semiannual coupon bonds…

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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9. Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next two years and 7% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t – 1)%, where t is the security’s maturity. The liquidity premium (LP) on all Gauge Imports Inc.’s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury — AAA 0.60% AA 0.80% A 1.05% BBB 1.45% Gauge Imports Inc. issues 12-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. 11.87% 11.32% 5.25% 12.42% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? The yield on a AAA-rated bond will be lower than the yield on a AA-rated bond. A…
3. Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 7% per year for each of the next three years and 6% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t - 1)%, where t is the security's maturity. The liguidity premium (LP) on all Pandar Corp.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury AAA 0.60% AA 0.80% A 1.05% BBB 1.45% Pandar Corp. issues 11-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. O 10.87% O 10.42% O 11.42% O 5.15% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on U.S. Treasury securities always remains static. O The yield on an…
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Bond J has a coupon rate of 4.2 percent. Bond K has a coupon rate of 14.2 percent. Both bonds have ten years to maturity, a par value of $1,000, and a YTM of 9.4 percent, and both make semiannual payments. a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. If interest rates suddenly fall by 2 percent instead, what is the percentage change in the price of these bonds? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a. Percentage change in price b. Percentage change in price Bond J % % Bond K do do % %
The following table shows the prices of a sample of Treasury bonds, all of which have coupon rates of zero. Each bond makes a single payment at maturity. Years to Maturity Price (% of face value) 1 98.052% 2 94.551 3 90.744 4 86.680 What is the 1-year interest rate? What is the 3-year interest rate? What is the 4-year interest rate? Is the yield curve upward-sloping, downward-sloping, or flat? Is this the usual shape of the yield curve?
Bonds often pay a coupon twice a year. For the valuation of bonds that make semiannual payments, the number of periods doubles, whereas the amount of cash flow decreases by half. Using the values of cash flows and number of periods, the valuation model is adjusted accordingly. Assume that a $1,000,000 par value, semiannual coupon US Treasury note with two years to maturity has a coupon rate of 4%. The yield to maturity (YTM) of the bond is 8.80%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: $913,697.55 $1,096,437.06 $776,642.92 $575,629.46 Based on your calculations and understanding of se The T-note described in this problem is selling at a discount premium pupon bonds, complete the following statement:
Bond J has a coupon rate of 7 percent and Bond K has a coupon rate of 13 percent. Both bonds have 16 years to maturity, make semiannual payments, and have a YTM of 10 percent. a. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e. g., 32.16.) b. What if rates suddenly fall by 2 percent instead? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
A government bond with 2 years until maturity has a face value of £120,000 and anannual nominal coupon rate of 1%. Assume that the relevant nominal market interestrate (annualized) is equal to 5%. The coupon payments are made every 6 months. Calculate the present value of the bond. Assume the individual coupons are stripped from the bond and soldseparately as zero coupon bonds. Calculate the market value of these zero couponbonds. Assume there are no further changes to the market rate. How would youexpect the price of the bond to evolve? Assume there exist a Callable bond with similar characteristics to thebond described above. Would you expect this Callable bond to have a higher orlower price? Explain why.
A bond, paying semi-annual coupons of 1% per annum, matures in 7 months time. The interest rate (with semi-annual compounding) for 1 month is 6.00%, while for 7 months, it is 4.90%. What is the dirty price of the bond?
Valuing semiannual coupon bonds Bonds often pay a coupon twice a year. For the valuation of bonds that make semiannual payments, the number of periods doubles, whereas the amount of cash flow decreases by half. Using the values of cash flows and number of periods, the valuation model is adjusted accordingly. Assume that a $1,000,000 par value, semiannual coupon U.S. Treasury note with three years to maturity has a coupon rate of 3%. The yield to maturity (YTM) of the bond is 11.00%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: $504,112.64 $800,178.79 $960,214.55 $680,151.97 Based on your calculations and understanding of semiannual coupon bonds, complete the following statements: • Assuming that
Bonds often pay a coupon twice a year. For the valuation of bonds that make semiannual payments, the number of periods doubles, whereas the amount of cash flow decreases by half. Using the values of cash flows and number of periods, the valuation model is adjusted accordingly. Assume that a $1,000,000 par value, semiannual coupon US Treasury note with five years to maturity has a coupon rate of 6%. The yield to maturity (YTM) of the bond is 9.90%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: $534,907.72 $849,059.88 $1,018,871.86 $721,700.90 Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: The T-note described in this problem is selling at a .
Assume that all interest rates in the economy decline from 8 percent to 7 percent. Which of the following bonds will have the smallest percentage increase in price? A A 10-year zero coupon bond. B An 8-year bond with a 9 percent coupon. E A 3-year bond with a 10 percent coupon. D A 10-year bond with a 10 per coupon. A 1-year bond with a 15 percent coupon.

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