a bond that does not pay coupons use semi-annual periods to be consistent / compare to others par = 1,000 Ex: t = 5.2 = 10 PV = 508.35 [491.65 = total interest paid 491.65/5= 98.33 interest paid por your straight line PU = (1+r) ² FU-1,000 PV = 508.35 (Ⓒ) = 5 years x 2 payments phy =10 1,000-508.35 = FU = PU (HN) + 1,000 = 508.35 (1+r)) 10 Zero Coupon Bonds A bond that pays no coupons at all must be offered at a price that is stated value. Such bonds are called zero coupon bonds, or just zeroes Suppose the Eight-Inch Nails (EIN) Company issues a $1,000 zero coupon bond. The initial price is set at $508.35. Even though no i made on the bond, zero coupon bond calculations use semiannual per with coupon bond calculations. Using semiannual periods, it is straig that, at this price, the bond yields 14 percent to maturity. The total inter of the bond is $1,000 - 508.35 = $491.65. For tax purposes, the issuer of a zero coupon bond deducts inter though no interest is actually paid. Similarly, the owner must pay taxes every year, even though no interest is actually received.
a bond that does not pay coupons use semi-annual periods to be consistent / compare to others par = 1,000 Ex: t = 5.2 = 10 PV = 508.35 [491.65 = total interest paid 491.65/5= 98.33 interest paid por your straight line PU = (1+r) ² FU-1,000 PV = 508.35 (Ⓒ) = 5 years x 2 payments phy =10 1,000-508.35 = FU = PU (HN) + 1,000 = 508.35 (1+r)) 10 Zero Coupon Bonds A bond that pays no coupons at all must be offered at a price that is stated value. Such bonds are called zero coupon bonds, or just zeroes Suppose the Eight-Inch Nails (EIN) Company issues a $1,000 zero coupon bond. The initial price is set at $508.35. Even though no i made on the bond, zero coupon bond calculations use semiannual per with coupon bond calculations. Using semiannual periods, it is straig that, at this price, the bond yields 14 percent to maturity. The total inter of the bond is $1,000 - 508.35 = $491.65. For tax purposes, the issuer of a zero coupon bond deducts inter though no interest is actually paid. Similarly, the owner must pay taxes every year, even though no interest is actually received.
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
I do not understand how the book is getting 14% coupon rate.
Transcribed Image Text:zero coupon bonds.
a bond that does not pay coupons
use semi-annual periods to be consistent / compare to others
par = 1,000
Ex:
t = 5.2 = 10
PV = 508.35
·
1,000 508.35
PU = (ltr)"
491.65/5 = 98.33 interest paid per year = straight line
FU=1,000
PV = 508.35
(t) = 5 years x 2 payments ply =10
FU = PU CHAN ²
1,000 = 508.35 (1+r))
+000 =(1+r) 10
508.35
+
10
[49165
1000
508.35
1.07 Fr
= 1+r
total interest paid
10
1,000
508.35
P
0,1449 -
HT
r
Zero Coupon Bonds
A bond that pays no coupons at all must be offered at a price that is much lower than its
stated value. Such bonds are called zero coupon bonds, or just zeroes.³
Suppose the Eight-Inch Nails (EIN) Company issues a $1,000 face value, five-year
zero coupon bond. The initial price is set at $508.35. Even though no interest payments are
made on the bond, zero coupon bond calculations use semiannual periods to be consistent
with coupon bond calculations. Using semiannual periods, it is straightforward to verify
that, at this price, the bond yields 14 percent to maturity. The total interest paid over the life
of the bond is $1,000 - 508.35 = $491.65.
For tax purposes, the issuer of a zero coupon bond deducts interest every year even
though no interest is actually paid. Similarly, the owner must pay taxes on interest accrued
every year, even though no interest is actually received.
O
BOOK SAYS THE BOND YIELD = 14%.....???
zero coupon bond
A bond that makes no
coupon payments, and
thus is initially priced at a
deep discount.
O
O
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