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c. Given the opportunity to invest in one of the three bonds listed below, which would you purchase? Assume an interest rate of 7%. Bond Face Value $1.000 Annual Coupon Rate 4% Maturity Price 1 year $990

c. Given the opportunity to invest in one of the three bonds listed below, which would you purchase? Assume an interest rate of 7%. Bond Face Value $1.000 Annual Coupon Rate 4% Maturity Price 1 year $990

Essentials Of Investments
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
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c. Given the opportunity to invest in one of the three bonds listed below, which would you purchase? Assume an interest rate of 7%. Bond A B C Face Value $1,000 $1,000 $1,000 Annual Coupon Rate 4% 7.5% 8.5% Maturity (years) 1 2 3 4 5 d. 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 Price 1 year $990 17 years $990 25 years $990 Price $934 $835 $767 $702 $630 Calculate the forward rate of interest for each year. How could you construct a 1- year forward loan beginning in year 3? Confirm that the rate on that loan equals the forward rate.
Transcribed Image Text:c. Given the opportunity to invest in one of the three bonds listed below, which would you purchase? Assume an interest rate of 7%. Bond A B C Face Value $1,000 $1,000 $1,000 Annual Coupon Rate 4% 7.5% 8.5% Maturity (years) 1 2 3 4 5 d. 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 Price 1 year $990 17 years $990 25 years $990 Price $934 $835 $767 $702 $630 Calculate the forward rate of interest for each year. How could you construct a 1- year forward loan beginning in year 3? Confirm that the rate on that loan equals the forward rate.
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