An investor is considering between purchasing a Treasury Bond and a bond from a large corporation. Both bonds have a face value of $1,000. The Treasury Bond has no risk, while the corporate bond has a 10% change of not repaying (a default). Both bonds are 2-year bonds and don't pay any coupons, only the final payment at maturity. a) Assuming that the interest rate in year 1 is 10% and in year 2 is expected to be 5%, what is the current price of each bond? Why are the values different? b) Now assume that the investor purchased the Treasury Bond a year has passed. How much can this bond be sold for if the interest rate is confirmed at 5%? c) Continue assuming that the investor purchased the Treasury Bond a year has passed. If the investor is offered the corporate bond for $800, should it be purchased? Explain.

An investor is considering between purchasing a Treasury Bond and a bond from a large corporation. Both bonds have a face value of $1,000. The Treasury Bond has no risk, while the corporate bond has a 10% change of not repaying (a default). Both bonds are 2-year bonds and don't pay any coupons, only the final payment at maturity. a) Assuming that the interest rate in year 1 is 10% and in year 2 is expected to be 5%, what is the current price of each bond? Why are the values different? b) Now assume that the investor purchased the Treasury Bond a year has passed. How much can this bond be sold for if the interest rate is confirmed at 5%? c) Continue assuming that the investor purchased the Treasury Bond a year has passed. If the investor is offered the corporate bond for $800, should it be purchased? Explain.

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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You are analyzing the cost of debt for a firm. You know that the firm's 14-year maturity, 8.6 percent coupon bonds are selling at a price of $832.00. The bonds pay interest semiannually. If these bonds are the only debt outstanding, answer the following questions. Problem 13.17 a1-a2(a1) Your answer is incorrect. What is the current YTM of the bonds? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to O decimal places, e.g. 15%.) Current YTM for the bonds %
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
Both Bond Bill and Bond Ted have 11.8 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 7 years to maturity, whereas Bond Ted has 24 years to maturity. Both bonds have a par value of 1,000. a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of these bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Hi, I'm working on this corporate finance question from my textbook. How do I solve it using formulas or the financial calculator? A bond promises a risk-free payment of $1000 in one year. The risk-free rate of interest is2.64%. a) What is the price of the bond? b) If the price of the bond is actually $960, what is the arbitrage strategy? Illustrate all cash flowstoday and one year from today.
Suppose a company is choosing between bank loans and bonds. The interest rate in the bank loan is 3.5%, and an investment bank predicted that the company will pay close to 4% to issue a bond with the same maturity. In addition, fees are estimated to be higher for the bond issuance than for the bank loan. Explain why this company may still decide to issue the bond rather than borrowing through a bank.
Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 4 percent annual interest and has 18 years remaining to maturity. The current yield to maturity on similar bonds is 12 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. What is the current price of the bonds? (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) Current price of the bond b. By what percent will the price of the bonds increase between now and maturity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Price increases by
You are offered an 6 year bond issued by Fordson, at a price of $943.22. The bond has a coupon rate of 9% and pays the coupon semiannually. Similar bonds in the market will yield 10% today. Do you buy the bonds at the offered price? Yes the bond is offered at a premium. O No, the bond offered is worth less than $943.22. Yes, the bond offered is being sold at a discount. O There is not enough information to determine.
You believe that stocks are overvalued so you elect to add bonds to your retirement plan to reduce future potential downside price risk. With cash you've received from the sale of equities, you target two bonds for purchase. What is the fair market value for each of these bonds if the YTM for both is 6.75%? First bond: What is the price of an 8-year 4.95% coupon bond with $1,000 face value paying coupons semiannually? $944.28 $908.15 $890.12 $1,117.72 $875.36
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?
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Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
Bond J has a coupon rate of 5 percent. Bond K has a coupon rate of 15 percent. Both bonds have eight years to maturity, a par value of $1,000, and a YTM of 11 percent, and both make semiannual payments. a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. If interest rates suddenly fall by 2 percent instead, what is the percentage change in the price of these bonds? Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. a. Percentage change in price b. Percentage change in price Bond J % % Bond K % %

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