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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Transcribed Image Text:The 6-months zero rate is 8% per annum with semi-annual compounding. Currently, a one-year bond with a
10% per annum coupon is trading at 96, with a par value of 100. The coupon is paid semi-annually.
Determine the one-year zero rate in terms of semi-annual compounding.
Expert Solution
Step 1: Introduction
Bonds are the financial instruments firms issue to holders for a specific period. This is a source of financing where firms borrow capital from lenders and in return for the value of investment offer a coupon payment periodically till completion of tenure. At maturity of tenure principal value of the investment will be paid back.
The most used types of bonds are municipal, corporate, and government bonds. Corporate bonds are issued by firms as they are riskier than other types of bonds and hence carry higher interest rates.
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