A company has issued a zero-coupon bond with a two-year maturity. The face value of each bond is $1,000. Investors believe that this company will default for sure on these bonds. Due to the default, investors will receive only 60 cents per dollar they are owed. Investors require an 6% return on their investment in these bonds. (Reminder: this is the applicable discount rate). The yield to maturity on these bonds (assume annual compounding) is closest to? Select one: A. 39.43% В. 35.55% С. 40.72% D. 38.14% E. 36.85%

A company has issued a zero-coupon bond with a two-year maturity. The face value of each bond is $1,000. Investors believe that this company will default for sure on these bonds. Due to the default, investors will receive only 60 cents per dollar they are owed. Investors require an 6% return on their investment in these bonds. (Reminder: this is the applicable discount rate). The yield to maturity on these bonds (assume annual compounding) is closest to? Select one: A. 39.43% В. 35.55% С. 40.72% D. 38.14% E. 36.85%

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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Lantech investor is deciding between two bonds: Bond A pay $72 annual interest and has a market value of $925. It has 10 years to maturity. Bond B pays $62 annual interest and has a market value of $910. It has two years to maturity. Par value of the bonds is $1,000. A. What is the current yield on both bonds? B. Which bond should be chosen and why? C. A drawback of current yield is that is doesn't consider the total life of the bond. E.g. Yield to maturity on Bond A is 8.33 percent. What is the yield to maturity on Bond B? D. Is your answer changed from parts B and C based on which bond should be chosen?
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.50 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate = 0.50% Default risk premium = 1.40% Liquidity risk premium = 1.00% Maturity risk premium = 2.00% a. What is the inflation premium? b. What is the fair interest rate on Moore Corporation 30-year bonds? Note: Round your percentage answers to 2 decimal places (ie., 0.1234 should be entered as 12.34). Expected inflation premium Fair interest rate
Please solve step by step with expla
You are considering an investment In 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.40 percent. Your broker has determined the following Information about economic activity and Moore Corporation bonds: Real risk-free rate = 0.60% Default risk premium = 1.30% Liquidity risk premium = 0.80% Maturity risk premium = 1.90% a. What is the inflation premium? (Round your answer to 2 decimal places.) Expected IP b. What is the fair interest rate on Moore Corporation 30-year bonds? (Round your answer to 2 decimal places.) Fair Interest rate
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 0.40 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate = 0.33% Default risk premium = 1.55% Liquidity risk premium = 0.90% Maturity risk premium = 1.05% a. What is the inflation premium?b. What is the fair interest rate on Moore Corporation 30-year bonds? (For all requirements, round your answers to 2 decimal places. (e.g., 32.16)) Inflation Premium= % Fair intrest rate= %
Corporate bonds usually have a call feature embedded in their contract, this means that the company can call those bonds earlier than maturity. This also means the when you price a corporate bond you must calculate the YTM, if the bond is held to maturity, and the YTC, the yield up to the callable period of the bond. A Verizon bond is currently selling for $775 with 7% coupon and a 10 year maturity. Assume the par(face) value is $1,000. Since this corporate bond, it is also callable at 5 years for $1,075 face value. Calculate the YTM and then the YTC. use the approx YTM formula O Can not be determined with the information given. O YTM = 10.42% , YTC = 14.62% O YTM = 10.42%, YTC = 5.30% O YTM = 8.80% , YTC - 7.69%
You are considering an investment in 20-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T - bills are currently earning 0.50 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:Real risk-free rateDefault risk premiumLiquidity 0.41% = 1.05 % = 0.90% = 0.75% risk premiumMaturity risk premium = a. What is the inflation premium?b. What is the fair interest rate on Moore Corporation 20-year bonds?
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4? Required A Price $940.93 Complete this question by entering your answers in the tabs below. 868.39 800.92 735.40 670.48 Required B Maturity (years) 2 3 Calculate the forward rate of interest for each year. Note: Round your answers to 2 decimal places. Required C Forward Rate % % Prov 12 of 12 Next
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate = 0.75% Default risk premium = 1.15% Liquidity risk premium = 0.50% Maturity risk premium = 1.75% What is the inflation premium? What is the fair interest rate on Moore Corporation 30-year bonds?
Bha
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.35 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate = 0.65% Default risk premium = 1.25% Liquidity risk premium = 0.70% Maturity risk premium = 1.85% What is the inflation premium? What is the fair interest rate on Moore Corporation 30-year bonds? ( explain all with proper address ) .
Last year Carson Industries issued a 10-year, 13% semiannual coupon bondat its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065and it sells for $1,200.a. What are the bond’s nominal yield to maturity and its nominal yield to call? Would aninvestor be more likely to earn the YTM or the YTC?b. What is the current yield? Is this yield affected by whether the bond is likely to be called?(Hint: Refer to footnote 6 for the definition of the current yield and to Table 7.1.)c. What is the expected capital gains (or loss) yield for the coming year? Is this yielddependent on whether the bond is expected to be called? Explain your answer.

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