⑪A forward contract written on a bond has 10 months remaining until maturity. The face value of the bond is $1000, and it pays a 7% coupon every 6 months. The final coupon is due immediately prior to the maturity of the forward.The relevant riskless rate of interest is 5%. If the bond is trading at $1025, calculate the theoretical forward price and initial value of the forward contract and explain the forward pricing relationship. Provide numerical examples ofarbitrage strategies for situations where a broker offers a price above, and below the theoretical forward price.

The theoretical forward price (F) of a bond:F = (S - C / 1+rf) (1 + rf)nGiven:S = $1025Face value of…

Answered: ⑪A forward contract written on a bond…

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

See similar textbooks

Similar questions

An investor wants to find the duration of a(n) 10-year, 6% semiannual pay, noncallable bond that's currently priced in the market at $541.25, to yield 15%. Using a 250 basis point change in yield, find the effective duration of this bond (Hint: use Equation 11.11). The new price of the bond if the market interest rate decreases by 250 basis points (or 2.5%) is $ (Round to the nearest cent.)
Give typing answer with explanation and conclusion A bond offers a coupon rate of 5%, paid annually, and has a maturity of 6 years. The current market yield is 12%. Face value is $1,000. If market conditions remain unchanged, what should be the Capital Gains Yield of the bond?
Suppose a 10-year, $1,000 bond with a coupon rate of 8.7% and semiannual coupons is trading for $ 1,034.28 a. What is the bond's yield to maturity (expressed as an APR with semiannual compounding)? b If the bond's yield to maturity changes to 9.9% APRwhat will be the bond's price?
A. Calculate the yield spread of the following floating rate bond: • Annual coupon rate = reference rate + 200 basis points• initial reference rate (annual) = 4%• The bond has a 10-year of term to maturity• Assume the bond’s par value = USD1000• The price of the bond = USD1,032.84 B. Suppose the new reference rate is decreased to 3% two years after the bond is issued. What is the price of the bond then?
Suppose a ten-year, $1,000 bond with an 8.5% coupon rate and semiannual coupons is trading for $1,034.45. a. What is the bond's yield to maturity (expressed as an APR with semiannual compounding)? b. If the bond's yield to maturity changes to 9.9% APR, what will be the bond's price? a. What is the bond's yield to maturity (expressed as an APR with semiannual compounding)? The bond's yield to maturity is 8 %. (Round to two decimal places.) b. If the bond's yield to maturity changes to 9.9% APR, what will be the bond's price? The new price for the bond is S. (Round to the nearest cent.)
There are three bonds that mature at the same time, have the same par value, and are expected to pay their first annual coupon 1 next year. The bonds are detailed in the below table. Bond A B с PV PV PV Present Value B ? ? ? PV B If ca r, then what can we say about the prices of the bonds today? (Enter >, <, or ?) PV C PV Yield to Maturity C r rb Coupon Rate ca с с
A risk-free 3-year annual coupon bond has a 5% coupon rate, a face value of $1,000, and trades for $950. The 1-year spot interest rate is 5%. The 2-year spot interest rate is 5.25%. The 3-year spot interest rate is 5.5%. What is your trading strategy? Please show your cash flows
← Suppose a seven-year, $1,000 bond with an 8.4% coupon rate and semiannual coupons is trading with a yield to maturity of 6.65%. a. Is this bond currently trading at a discount, at par, or at a premium? Explain. b. If the yield to maturity of the bond rises to 7.05% (APR with semiannual compounding), what price will the bond trade for? a. Is this bond currently trading at a discount, at par, or at a premium? Explain. (Select the best choice below.) O A. Because the yield to maturity is less than the coupon rate, the bond is trading at a premium. B. Because the yield to maturity is greater than the coupon rate, the bond is trading at par. OC. Because the yield to maturity is greater than the coupon rate, the bond is trading at a premium. D. Because the yield to maturity is less than the coupon rate, the bond is trading at a discount.
Example: Suppose that a bond has a face value of P100,000and its maturity date is 10 years from now. The coupon rate is5% payable semi-annually. Find the fair price of this bond, assuming that the annual market rate is 4%. Given: Coupon rate r= 5%, payable semi - annually Face Value = 100,000 Time to maturity = 10 years Number of periods = 2(10) = 20 Market rate = 4% The bondholder receives 20 payments of P2,500 each, and P100,000 at t = 10. Present Value of 100,000: F P =- 100000 = 67,556.42 1+ 0.0410 Present Value of 20 payments of Php2500 each: Convert 4% to equivalent semi-annual rate: 1+ jm 0.04 1= (1+=)" -1 - (1+ ) - 1 - 1 = m 2 | = 0.0404
A n-year annual coupons bond with coupon rate r per year. The yield rate is 0.10. Calculate the Macaulay duration of the bond for all four possible combinations of parameters: • n = 10 or 30 • r = 0.05 or 0.15
4. (i) A forward contract written on a bond has 10 months remaining until maturity. The face value of the bond is $1000, and it pays a 7% coupon every 6 months. The final coupon is due immediately prior to the maturity of the forward. The relevant riskless rate of interest is 5%. If the bond is trading at $1025, calculate the theoretical forward price and initial value of the forward contract and explain the forward pricing relationship. (ii) Provide numerical examples of arbitrage strategies for situations where a broker offers a price above, and below the theoretical forward price.

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS