For example, assume Ethan wants to earn a return of 7.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 12.25%coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsicvalue:+Intrinsic Value =+-+-+-+-+(1+C)|Complete the following table by identifying the appropriate corresponding variables used in the equation.UnknownVariable NameVariable Value$1,000Semiannual required return

Calculating the intrinsic value of the bond. We have,Intrinsic value = A / (1+C)1 + A / (1+C)2 + A /…

Answered: For example, assume Ethan wants to earn…

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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An investor has $633,000 to invest in bonds. Bond A yields an average of 8% and the bond B yields 5%. The investor requires that at least 3 times as much money be invested in bond A as in bond B. You must invest in these bonds to maximize his return. This can be set up as a linear programming problem. Introduce the decision variables: ?=dollars invested in bond A ?=dollars invested in bond B Compute ?+? $ ________. Round to the nearest cent.
Use the following table to fill in values for the bond's coupon payment and present value, and Sam's semiannual required rate of return for this investment. Variable Name Coupon Payment Semiannual Required Rate of Return Present Value Variable Value Now, suppose Sam wants to earn a return of 14.00 percent, but the bond being considered for purchase offers a coupon rate of 14.00 percent. It is a $1,000 par value bond that pays a 14.00 percent coupon rate (distributed semiannually) and has three years remaining to maturity. The bond's present value is its par value, which means that the bond is which is Given your calculations and conclusions, which of the following statements are true? Check all that apply. When the coupon rate is less than Sam's required rate of return, the bond should trade at a premium. When the coupon rate is equal to Sam's required return, the bond should trade at par. When the coupon rate is less than Sam's required rate of return, the bond should trade at a…
1) Explain the concept of interest rate risk in bond investment 2) show a numerical example of it by calculating % changes in price for 1 year and 3-year annual coupon bonds. Assume coupon interest rate = 12%, Yield to Maturity = 6%, Face value= 100. Use 2% increase in YTM (i.e., 6% → 8%).
The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of the face value): Maturity (years) Price (per $100 face value) 1 $96.32 a. Compute the yield to maturity for each bond. b. Plot the zero-coupon yield curve (for the first five years). c. Is the yield curve upward sloping, downward sloping, or flat? a. Compute the yield to maturity for each bond. The yield on the 1-year bond is %. (Round to two decimal places.) 2 $91.93 3 $87.36 4 5 $82.57 $77.42
Show all workings. Complete the following table and draw a graph showing how bond pricefor each bond changes over time as they move towards their maturitydates. Describe the relationship between bond prices and timeremaining for maturity.YearsreminingtomaturityBOND ACoupon rate = 8% p.a.Market interest rate =6% p.a.BOND BCoupon rate = 6% p.a.Market interest rate =6% p.a.BOND CCoupon rate = 4% p.a.Market interest rate =6% p.a.109876543210
a. What is the duration of a two-year bond that pays an annual coupon of 11.5 percent and has a current yield to maturity of 13.5 percent? Use $1,000 as the face value. (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616)) b. What is the duration of a two-year zero-coupon bond that is yielding 11.5 percent? Use $1,000 as the face value. a. Duration b. Duration years years
Calculate YTC using a financial calculator by entering the number of payment periods until call for N, the price of the bond for PV, the interest payments for PMT, and the call price for FV. Then you can solve for 1/YR YTC. Again, remember you need to make the appropriate adjustments for a semiannual bond and realize that the calculated 1/YR is on a periodic basis so you will need to multiply the rate by 2 to obtain the annual rate. In addition, you need to make sure that the signs for PMT and FV are identical and the opposite sign is used for PV; otherwise, your answer will be incorrect. A company is more likely to call its bonds if they are able to replace their current high-coupon debt with less expensive financing. A bond is more likely to be called if its price is above par-because this means that the going market interest rate is less than its coupon rate. Quantitative Problem: Ace Products has a bond issue outstanding with 15 years remaining to maturity, a coupon rate of 8.4%…
9. Interest Rate Risk. Suppose that you are a fixed income portfolio manager at Bourbon Street Capital. You have the following bonds issued by Royal, Inc. and Chartres, LLC in your portfolio and you want to understand the risk profile of your portfolio. Given that both bonds pay semiannual coupons, answer the following questions. (Remember to convert your answer to units of full years.) Coupon Yield to maturity Maturity (years) Royal, Inc. Chartres, LLC. Bond A Bond B 9% 8% 5 $100.00 $104.055 8% 8% 2 Par $100.00 Price $100.00 (a) What is the DV01 (at current prices) for bonds A and B? (b) What are the Macaulay Durations (at current prices) for the two bonds? (c) What are the modified durations for the two bonds? (d) What is the convexity of the two bonds?
A plot of the yields on bonds with different terms to maturity but the same risk, liquidity, and tax considerations is known as O A. a yield curve. B. a risk-structure curve. OC. a term-structure curve. 5- O D. an interest-rate curve. Suppose people expect the interest rate on one-year bonds for each of the next four years to be 3%, 6%, 5%, and 6%. If the expectations theory of the term structure of interest rates is correct, then the implied interest rate on bonds with a maturity of four years is nearest whole number). %. (Round your response to the 2- Refer to the figure on your right. Suppose the expected interest rates on one-year bonds for each of the next four years are 4%, 5%, 6%, and 7%, respectively. 1. 1.) Use the line drawing tool (once) to plot the yield curve generated. 3 Term to Maturity in Years 2.) Use the point drawing tool to locate the interest rates on the next four years. 5. 3- Interest Rate .....
1)Your broker offers to sell for $1,157 a AAA-rated bond with a coupon rate of 7 percent and a maturity of six years. Given that the interest rate on comparable debt is 4 percent, calculate the bond's price. Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar. 2)Is your broker fairly pricing the bond? 3)the bond should or should not be purchased?
If possible, please calculate using excel and show formulas. The spot interest rates in the following downward-sloping term structure are: r1 = 4.6%, r2 = 4.4%, r3 = 4.2%, and r4 = 4.0%, r5=2%. Assume face value is $1,000. Calculate bond prices of a 5% coupon bond.
Unlike the coupon interest rate, which is fixed, a bond's yield varies from day to day depending on market conditions. To be most useful, it should give us an estimate of the rate of return an investor would earn if that investor purchased the bond today and held it for its remaining life. There are three different yield calculations: Current yield, yield to maturity, and yield to call. A bond's current yield is calculated as the annual interest payment divided by the current price. Unlike the yield to maturity or the yield to call, it does not represent the actual return that investors should expect because it does not account for the capital gain or loss that will be realized if the bond is held until it matures or is called. This yield was popular before calculators and computers came along because it was easy to calculate; however, because it can be misleading, the yield to maturity and yield to call are more relevant. The yield to maturity (YTM) is the rate of return earned on a…

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