A bond with a face value of $1,000 and a 10% coupon rate is going to mature in 15 years. Assuming that the coupon is paid annually, determine the value of this bond if your cost of debt is 13%. Now, there is a zero coupon bond with similar risk and same maturity selling for $180 currently. The face value of this zero coupon bond is also $1,000. Assume that the market price of the bond in part a is $820, which bond (the coupon bond in part a and zero coupon bond in part b) should you invest in, or both, or none of them ? Explain briefly whether a zero-coupon bond will be selling (i) at a premium, and (ii) at par.
A bond with a face value of $1,000 and a 10% coupon rate is going to mature in 15 years. Assuming that the coupon is paid annually, determine the value of this bond if your cost of debt is 13%. Now, there is a zero coupon bond with similar risk and same maturity selling for $180 currently. The face value of this zero coupon bond is also $1,000. Assume that the market price of the bond in part a is $820, which bond (the coupon bond in part a and zero coupon bond in part b) should you invest in, or both, or none of them ? Explain briefly whether a zero-coupon bond will be selling (i) at a premium, and (ii) at par.
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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A bond with a face value of $1,000 and a 10% coupon rate is going to mature in 15 years.
- Assuming that the coupon is paid annually, determine the value of this bond if your cost of debt is 13%.
- Now, there is a zero coupon bond with similar risk and same maturity selling for $180 currently. The face value of this zero coupon bond is also $1,000. Assume that the market price of the bond in part a is $820, which bond (the coupon bond in part a and zero coupon bond in part b) should you invest in, or both, or none of them ?
- Explain briefly whether a zero-coupon bond will be selling (i) at a premium, and (ii) at par.
- How are the cash flows of a zero-coupon bond different from those of a coupon bond ? Explain the implication(s) of the difference(s) with respect to their effective maturity.
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