A Bank offers both loans and deposits at a nominal interest rate of 4% that is continuously compounded A) What is the effective rate offered by the bank? B) The bank also offers a 3-year bond with face value £10000, redeemable at par, with 10% annual coupons. What is the final payment of that bond? C) Assuming there are no arbitrage opportunities, what is the price of the above bond?

A Bank offers both loans and deposits at a nominal interest rate of 4% that is continuously compounded A) What is the effective rate offered by the bank? B) The bank also offers a 3-year bond with face value £10000, redeemable at par, with 10% annual coupons. What is the final payment of that bond? C) Assuming there are no arbitrage opportunities, what is the price of the above bond?

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 2EP

See similar textbooks

Related questions

Q: Suppose that discount bond prices are as follows: see picture a. A customer of your bank wants a…

Q: 4. Suppose the U.S. Federal Reserve offers a bond for $635.20 at 8 years to maturity. You will not…

A: Maturity price = $ 950 Issue price = $ 635.20 Period = 8 Years

Q: maturity and 4.1% for a three-year maturity (all effective annual rates). Suppose that someone is…

A: Investment - A purchase made with the intention of creating income or capital growth is known as an…

Q: Suppose you purchase a T-bills that is 125 days from maturity for $9,765. The T-bills has a face…

A: A Treasury Bill (T-Bill) is a short-term debt obligation supported by the United States Treasury…

Q: Vi (H X.) 25) A credit market instrument that pays the owner a fixed coupon payment every year until…

A: This question involves identifying the correct term for a credit market instrument that pays a fixed…

Q: Suppose that there is a bank that is offering to lend and/or borrow money at an interest rate of 8%…

A: Price of Bond/Gold mine = Present Value of Future Cash Flows

Q: A bank today makes $100 in 3-year loans with a 16% fixed annual interest rate. It funds the loans…

A: Here,Interest Rate on Loan is 16%Interest Rate on CD is 7%Variable Interest Rate is 4.5%Fixed…

Q: A bank today makes $100 in 3-year loans with a 16% fixed annual interest rate. It funds the loans…

A: Here,Interest the Rate on the loan is 16%The interest Rate on CD is 7%Variable Interest Rate is…

Q: uppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the…

A: Future Value = Present Value * (1+r)^nWhere,r = rate of interest per period n = no. of compounding…

Q: After setting aside the required reserves, the bank decides to invest the remaining amount of cash.…

A: Lets understand the basics. When bond interest rate is more than the yield to maturity rate then…

Q: A 10-year government bond has face value of OR 200 and a coupon rate of 6% paid semiannually. Assume…

A: Hi, since multiple questions are posted, I will answer the first one as per the guidelines. Please…

Q: Assuming there is no compound interest, let's say you pay $4,000 for a perpetual bond from…

A: The bonds carry the coupon and based on the coupon and face value of bond there are going to be…

Q: Required: a. Calculate the forward rate of interest for each year. b. How could you construct a…

A: A forward rate is a term that is used to determine the interest rate that will be charged for the…

Q: Suppose the U.S. Treasury offers to sell you a bond for $2,000. No payments will be made until the…

A: Bond is type of debt security which carries fixed return as interest. It can be redeem after the…

Q: The British government has a consol bond outstanding paying £100 per year forever. Assume the…

A: Consol bonds: They are the perpetual bonds that has no maturity period. They are the instruments…

Q: A 1-year corporate bond will pay the following: 1. The promised amount of $10,000, with probability…

A: Default Premium:The default premium is the additional return that investors demand to compensate for…

Q: Consider a bond that promises the following cash ows. The required discount rate is 12%. Year…

A: Periodic Cash Flows refers to the cash flows where there are equal amount of cash flows at regular…

Q: Suppose the U.S. Treasury offers to sell you a bond for $687.25. No payments will be made until the…

A: Offer price = $ 687.25 Maturity price = $ 1000 Years to maturity = 5 Years

Q: Suppose the current interest rate on a one-year bond is 2% and the current interest rate on a…

A: The expectation hypothesis of the term structure of bonds states that the interest rates of…

Q: The prices of zero-coupon bonds with various maturities are given: maturity in years price 1 975.66…

A: Zero-Coupon Bond is debt instrument which is issued at price lower than face value but matured at…

Q: Suppose that the prices of zero-coupon bonds with various maturities are given in the following…

A: Given:

Q: A Bank offers both loans and deposits at a nominal interest rate of 4% that is continuously…

A: Price of bond is the present value of coupon payment plus present value of the par value of the bond…

Q: Suppose that a commercial bank wants to buy Treasury bills. These instruments pay $6,000 in one year…

A: Treasury bills pay in one year = $6000 Selling price = $6100

Q: Suppose that there is a bank that is offering to lend and/or borrow money at an interest rate of 8%…

A: Arbitrage Profit: It is possible to make money off of arbitrage by purchasing and selling the same…

Q: A Bank offers both loans and deposits at a nominal interest rate of 5% that is continuously…

A: In case of continuous compounding, Effective annual rate of interest = [e^(r) -1] x 100wheree =…

Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

A Bank offers both loans and deposits at a nominal interest rate of 4% that is continuously compounded

A) What is the effective rate offered by the bank?

B) The bank also offers a 3-year bond with face value £10000, redeemable at par, with 10% annual coupons. What is the final payment of that bond?

C) Assuming there are no arbitrage opportunities, what is the price of the above bond?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Given details:

VIEW

Step 2: A) Find the effective rate:

VIEW

Step 3: b) Find the final payment for the bond:

VIEW

Step 4: c) Find the price of the bond:

VIEW

Solution

VIEW

Step by step

Solved in 5 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

A Bank offers both loans and deposits at a nominal interest rate of 4% that is continuously compounded. What is the effective rate offered by the bank? The bank also offers a 3-year bond with face value £10000, redeemable at par, with 10% annual coupons. What is the final payment of that bond? Assuming there are no arbitrage opportunities, what is the price of the above bond? Give your answer to five valid digits.
A Bank offers both loans and deposits at a nominal interest rate of 5% that is continuously compounded. (a) What is the effective rate offered by the bank? Give your answer to 3 digits. Do not write the % sign. For example, if your answer is 4.15% then write 4.15. Answer: (b) The bank also offers a 3-year bond with face value £10000, redeemable at par, with 10% annual coupons. What is the final payment of that bond? Do not enter the £ sign. Answer: (C) T sign. Answer: Assuming there are no arbitrage opportunities, what is the price of the above bond? Give your answer to five valid digits. Do not enter the £
In this problem we are going to calculate bond prices and returns Suppose that the yield on a 3 year note is 2.5%. a) Calculate the price of the 3 year note (face value = $1000) with three annual coupon payments (after year 1, after year 2, after year 3) of $30, i.e., the coupon rate is 3.0%. b) Is this note selling at a discount or premium? Explain. Suppose that after one year and after you receive one coupon payment, you decide to sell your note. Your note is now a two year note with one coupon payment after 1 year and another after year 2. Consider the following two scenarios: Scenario #1 - interest rates on what is now a two year note (i.e., your note) have fallen to 1.00% Scenario #2 - interest rates on what is now a two year note (i.e., your note) have risen to 4% c) given scenan d) Calculate the price that you can sell your note for under scenario #1 and the associated rate of return when you sell your note Calculate the price that you can sell your note for under scenario #2…
I (Interest rates) 1. Consider a bank account paying interest rate R2 = 4% with semi-annual compounding frequency. What is the equivalent rate R1 with yearly compounding frequency? What is the equivalent rate Rc with continuous compounding? 2. Explain briefly (in words) what are the potential pitfalls of using the Internal Rate of Return (IRR) for the evaluation of investment projects. 3. Consider the following two bonds: bond (A) is a zero-coupon bond with maturity TA and duration DA = TA; bond (B) is a coupon bond with maturity TB > TA and duration DB = TA. Which of the two bonds has a greater convexity? (Justify your answer.)
A bank today makes $100 in 3-year loans with a 16% fixed annual interest rate. It funds the loans today with $100 in 1-year CDs that currently have a 7% annual interest rate. It has the option of entering an interest rate swap contract. The contract includes a variable rate of 4.5% and a fixed rate of 7.5%. If the bank chooses to hedge its interest rate risk using a $100 notional value swap contract, what is the bank's expected net interest income in the first year if all interest rates remain the same throughout the year? A) $9 OB) 12 OC) $7 OD) $16 O E) $6
A bank today makes $100 in 3-year loans with a 16 % fixed annual interest rate. It funds the loans today with $100 in 1-year CDs that currently have a 7% annual interest rate. It has the option of entering an interest rate swap contract. The contract includes a variable rate of 4.5% and a fixed rate of 7.5%. If the bank chooses to hedge its interest rate risk using a $100 notional value swap contract, what is the bank's expected net interest income in the first year if all interest rates remain the same throughout the year? A) $9 OB) 12 OC) $7 OD) $16 OE) $6
After setting aside the required reserves, the bank decides to invest the remaining amount of cash. The bank invests £15 million in a coupon bond issues by UK Treasury. What remains is loaned out. The coupon bond of point (e) pays a coupon of 4% per year, paid semi-annually. It has 2 years to maturity. If the current Yield-to-Maturity is 3.5% semi-annually, what is the price of the bond?
Suppose that there is a bank that is offering to lend and/or borrow money atan interest rate of 8% (regardless of the time-to-maturity of the loan).Further suppose that there is a two-year coupon bond trading with a facevalue of $100 and a coupon rate of 5% trading in the market. Price the bondusing an explicit no-arbitrage argument.a) Suppose that the bond in the previous question is actually trading for $92.Show how you could exploit the mispricing to make an arbitrage profit.( Question)
Suppose that a commercial bank wants to buy Treasury bills. These instruments pay $6,000 in one year and are currently selling for $6,100. The yield to maturity of these bonds is%. (Round your response to two decimal places.) Is this a typical situation? OA. No. In normal times banks will not choose to pay more than the face value of a discount bond, since that implies negative yields to maturity. B. Yes. Often times, investors and banks will choose to pay more than the face value of a discount bond. It is more convenient to hold Treasury bills or keep their funds as deposits at the central bank because they are stored electronically.
Suppose the current interest rate on a one-year bond is 2% and the current interest rate on a two-year bond is 4%. The term premium on a two-year bond is 1%. According to the expectations hypothesis, what interest rate should we expect on a one-year bond next year? Answer as a percentage to one decimal place and do not include symbols (e.g. $, %, commas) in your answer. Answer:
A 1-year corporate bond will pay the following: 1. The promised amount of $10,000, with probability 70%. 2. only $9,000 with probability 29%; and 3. nothing with probability 1% 1) If the risk-free market interest rate is 5%, what minimum promised interest rate must the lender demand just to break even , 2) Then, what would be the default premium on this bond under a risk-neutral world. 3) If the bond, however, has a promised rate of return of 11%, what is the risk premium on this bond under a risk-averse world
1. Suppose a commercial bank wants to buy Treasury bills. If you know that these instruments pay €5,000 in a year and currently sell for €5,012. Which is the yield to maturity of these bonds? Is this a typical situation? Because? 2. A government bond of face value £1,000 has a coupon rate 2%, its current price is £1,100 and its price is expected to increase to £1, 150 next year. Calculate the current coupon yield, the rate expected capital gain (only taking into account prices) and total return expected (capital gains and coupon gains).