A government bond matures in 7 years, makes annual coupon payments of 5.6% and offers a yield of 3.6% annually compounded.Assume face value is $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimalplaces.)a. Suppose that one year later the bond still yields 3.6%. What return has the bondholder earned over the 12-month period?Rate of returnb. Now suppose that the bond yields 2.6% at the end of the year. What return did the bondholder earn in this case?Rate of return

Bond - It is an instrument that represents the loan made by the investor to the company which the…

Answered: A government bond matures in 7 years,…

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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Assume you can buy a bond that has a par value of $1000, matures in 10 years, yielding 6% and has a duration of 5. If you would like to use this bond to form a guaranteed investment contract “GIC” and offer a guaranteed rate of return to investors for certain years. a. what is the maximum yield you can offer? Why? Explain. b. For how many years would you make the guarantee? Explain.
Solve the following questions without using Excel. A 5 year bond with a coupon of 7%, that pays interest annually, has its next coupon due in 12 months. It yields 5% per annum. a) compute the duration of the bond. Use this to compute approximately how the price of the bond will change if yields rise to 6%. (b) Compute the convexity of the bond. Use this to obtain a more precise estimate of the change in the price which will occur if the yield rises to 6%.
The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). (Round the final answers to 2 decimal places.) a. Suppose that today you buy an 9.2% annual coupon bond for $1,180. The bond has 19 years to maturity. What rate of return do you expect to earn on your investment? Expected rate of return % b-1. Two years from now, the YTM on your bond has
The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is. known as the holding period yield (HPY). (Round the final answers to 2 decimal places.) a. Suppose that today you buy an 9.5% annual coupon bond for $ 1,210. The bond has 19 years to maturity. What rate of return do you expect to earn on your investment? Expected rate of return % b-1. Two years from now, the YTM on your bond has declined by 1%, and you decide to sell. What price will your bond sell for? (Omit $ sign in your response.) Bond price $ b-2. What is the HPY on your investment? HPY%
What is the price of a bond with the following information? It is 1.5 years until expiration. The coupon rate is 7 percent and coupon payments are made once per year. The market rate of return is 5.9 percent. The bond has a face value of 2000 SEK. Tips Draw a time axis so that you do not make any mistakes with the discounting. Don't look at the cash flows as an annuity, but as two separate cash flows. There is always a coupon payment when the bond matures, how long is it then until the next coupon payment? (Answers are rounded to integers) a) 265 b) 2100 c) 1971 d) 1990 e) 2216
A twenty-year government bond with a face value of 120$ makes annual coupon payments of 1% and offers a yield of 8% annually compounded.Suppose that one year later the bond yields at 5%. Showing your calculations,a) What return has bondholders earned over the 12-month period? Instead, suppose now that one year later the bond yields at 5.5%.b) What return has bondholders earned over the 12-month period?
Consider a bond (with par value = $1,000) paying a coupon rate of 10% per year semiannually when the market interest rate is only 4% per half-year. The bond has three years until maturity. Required: a. Find the bond's price today and six months from now after the next coupon is paid. b. What is the total (6-month) rate of return on the bond? Complete this question by entering your answers in the tabs below. Required A Required B Find the bond's price today and six months from now after the next coupon is paid. Note: Round your answers to 2 decimal places. Current price Price after six months $ $ 1,052.42 1,044.52
A newly issued bond pays its coupons once a year. Its coupon rate is 4.7%, its maturity is 15 years, and its yield to maturity is 7.7%. a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.7% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Holding-period return % b. If you sell the bond after one year when its yield is 6.7%, what taxes will you owe if the tax rate on interest income is 40% and the tax rate on capital gains income is 30%? The bond is subject to original-issue discount (OID) tax treatment. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Tax on interest income $ Tax on capital gain $ Total taxes $ c. What is the after-tax holding-period return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)…
Consider a 4-years bond with a 8% annual coupon rate and semi-annual payments. Let us suppose that the zero coupon curve rate today with annual compounding is given by the one in Table 1.(a) Calculate the discount factors for all the previous maturities and then the bond price.(b) Calculate the equivalent continuous compounding rates. What do you expect as result for the bond price with these rates? Should it be lower, higher or equal to the one in part (a)? Why? The equivalent continuous compounding rates should be lower than the annual rates. Why?
Consider a 30-year Bond with $1,000 face value, which offers 10% annual coupon, paid once a year.Assume that interest rates, hence YTM (Yield to Maturity) changed from 6% to 7%. What is the duration of the Bond in years? Enter your answer in the following format: 12.34Hint1: Answer is between 10.24 and 12.77Hint2: Duration = (new bond price - old bond price) * (-100) / old bond price
Suppose you have a 10-year bond (the bond will mature in 10 years), with a coupon rate of 2.45%. Coupons are paid on a semi-annual basis. The face value of the bond is $1000. Suppose the bond's yield to maturity suddenly increases from 2.13% to 2.63%. What is the impact on the price of the bond in percentage terms? Justify all of your response.
Consider a bond with a duration of 8.8 years priced at $1,100. If market interest rates were to increase by 0.25%, what would be the predicted new bond price according to duration?

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