b) At what yield (or rate) will the loan be trading at par? Explain whether it is trading above or below par in a). Answers.. c) Assume that the rate of interest is 'expected to drop to 3 per cent, derive and calculate the rate of capital gain (or loss)? Answers..
b) At what yield (or rate) will the loan be trading at par? Explain whether it is trading above or below par in a). Answers.. c) Assume that the rate of interest is 'expected to drop to 3 per cent, derive and calculate the rate of capital gain (or loss)? Answers..
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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part B and C
Transcribed Image Text:4. Suppose that the market rate of interest is 12 per cent on a government bond with a
perpetuity payment, which is a coupon value (annual payment) of £6 per year indefinitely.
The face value of the loan is £100.
a) Define and calculate the price of the bond?
Answers..
b) At what yield (or rate) will the loan be trading at par? Explain whether it is trading above
or below par in a).
Answers...
c) Assume that the rate of interest is 'expected' to drop to 3 per cent, derive and calculate
the rate of capital gain (or loss)?
Answers .
d) Derive and explain the expression for the number of bonds held representing the
amount of money spent on bonds (B) with the corresponding mean rate of return (HR).
Answers..
e) Imagine that W = £40,000, what is the amount spend on bonds, B', if the standard
deviation (SD) of earnings (s) is equal to 0.10 with a 3,000,the SD of the total return on
bonds, SR.
What is the money holding, which is M*?
Answers..
Find the mean return on bonds with u = 1.
Answer..
Transcribed Image Text:f) The expected fall in rate of interest takes place, that is 3 per cent, and therefore, the
standard deviation sg reduces to 2,000 with a u = 2.
How much is now spent on bonds?
Answer .
How much is the money holding?
Answer .
What is the new value of the mean on bonds?
Answer..|
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