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Calculate the price of the bond if the market interest rate falls from 4% to 3% per half-year. Com- pare the capital gains for the fall in the interest rate to the capital losses incurred when the rate increases from 4% to 5%.

Calculate the price of the bond if the market interest rate falls from 4% to 3% per half-year. Com- pare the capital gains for the fall in the interest rate to the capital losses incurred when the rate increases from 4% to 5%.

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
Problem 1PS
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Please help me on these 4 questions. (Reference for Concept check 10.2:  par value - $1000, Coupon rate - 8% and time to maturity - 30yrs)

discount bonds It is common to hear peopie taikng 100SCly auout uic yICid Oll a vond. In these cases Bonds selling below par value. almost always are referring to the yield to maturity. CONCEPT What will be the relationship among coupon rate, current yield, and yield to maturity for bonds selling at discounts from par? Illustrate using the 30-year 8% (semiannual payment) coupon bond 10.3 check assuming it is selling at a yield to maturity of 10%. Yield to Cal| 2,348.65 30 years CONCEPT check Calculate the price of the bond if the market interest rate falls from 4% to 3% per half-year. Com- pare the capital gains for the fall in the interest rate to the capital losses incurred when the rate increases from 4% to 5%. 10.2 298 Part THREE Debt Securities CONCEPT A 20-year maturity 9% coupon bond paying coupons semiannually is callable in five veare price of $1,050. The bond currently sells at a yield to maturity of 8% (bond equivalent vielat we is the yield to call? 10.4 check СЕРТ eck What will be the price of the bond in Example 10.10 in yet another year, when only one vear remains until maturity? What is the rate of return to an investor who purchases the bond at $982.17 and sells it one year later? 10.5 Whan 1han Luom t
Transcribed Image Text:discount bonds It is common to hear peopie taikng 100SCly auout uic yICid Oll a vond. In these cases Bonds selling below par value. almost always are referring to the yield to maturity. CONCEPT What will be the relationship among coupon rate, current yield, and yield to maturity for bonds selling at discounts from par? Illustrate using the 30-year 8% (semiannual payment) coupon bond 10.3 check assuming it is selling at a yield to maturity of 10%. Yield to Cal| 2,348.65 30 years CONCEPT check Calculate the price of the bond if the market interest rate falls from 4% to 3% per half-year. Com- pare the capital gains for the fall in the interest rate to the capital losses incurred when the rate increases from 4% to 5%. 10.2 298 Part THREE Debt Securities CONCEPT A 20-year maturity 9% coupon bond paying coupons semiannually is callable in five veare price of $1,050. The bond currently sells at a yield to maturity of 8% (bond equivalent vielat we is the yield to call? 10.4 check СЕРТ eck What will be the price of the bond in Example 10.10 in yet another year, when only one vear remains until maturity? What is the rate of return to an investor who purchases the bond at $982.17 and sells it one year later? 10.5 Whan 1han Luom t
AS15-52-5722 300 Part THREE Debt Securities To illustrate built-in capital gains or losses, suppose a bond was issued several years ago when interest rate was 7%. The bond's annual coupon rate was thus set at 7%. (We suppose for simar ity that the bond pays its coupon annually.) Now, with three years left in the bond's life, the mic- interest rate is 8% per year. The bond's fair market price is the present value of the remaining apn EXAMPLE 10.10 Fair Holding-Period Return coupons plus payment of par value. That present value is 10 $70 x Annuity factor(8%, 3) + $1,000 × PV factor(8%, 3) = $974.23 which is less than par value. In another year, after the next coupon is paid and remaining maturity falls to two years, the bond will sell at $70 x Annuity factor(8%, 2)+ $1,000 × PV factor(8%, 2) = $982.17 %3D thereby providing a capital gain over the year of $7.94. If an investor had purchased the bond at $974.23, the total return over the year would equal the coupon payment plus capital gain, or $70 + $7.94 = $77.94. This represents a rate of return of $77.94/$974.23, or 8%, exactly the current rate of return available elsewhere in the market. CONCEPT 10.5 What will be the price of the bond in Example 10.10 in yet another year, when only one year remains until maturity? What is the rate of return to an investor who purchases the bond at $982.17 and sells it one year later? check equ ret ma To capital or a was ago when the interest rate was 7%. The was thus set at for simplic- lo
Transcribed Image Text:AS15-52-5722 300 Part THREE Debt Securities To illustrate built-in capital gains or losses, suppose a bond was issued several years ago when interest rate was 7%. The bond's annual coupon rate was thus set at 7%. (We suppose for simar ity that the bond pays its coupon annually.) Now, with three years left in the bond's life, the mic- interest rate is 8% per year. The bond's fair market price is the present value of the remaining apn EXAMPLE 10.10 Fair Holding-Period Return coupons plus payment of par value. That present value is 10 $70 x Annuity factor(8%, 3) + $1,000 × PV factor(8%, 3) = $974.23 which is less than par value. In another year, after the next coupon is paid and remaining maturity falls to two years, the bond will sell at $70 x Annuity factor(8%, 2)+ $1,000 × PV factor(8%, 2) = $982.17 %3D thereby providing a capital gain over the year of $7.94. If an investor had purchased the bond at $974.23, the total return over the year would equal the coupon payment plus capital gain, or $70 + $7.94 = $77.94. This represents a rate of return of $77.94/$974.23, or 8%, exactly the current rate of return available elsewhere in the market. CONCEPT 10.5 What will be the price of the bond in Example 10.10 in yet another year, when only one year remains until maturity? What is the rate of return to an investor who purchases the bond at $982.17 and sells it one year later? check equ ret ma To capital or a was ago when the interest rate was 7%. The was thus set at for simplic- lo
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