Two years ago, you bought a 10-year, 6% semiannual coupon payment bond when its yield-to-maturity was 8%. Right after you purchased this bond, the yield-to-maturity on this bond increasedto 9% and stayed at the same level in the next two years. You reinvested the coupon payments atthe market rate of 9%. You just sold the bond at 9% yield-to-maturity. What is your annualizedholding period return? What is your capital gain/loss? Note: Remember that capital gains/losses arecomputed with respect to the price on the constant price-yield trajectory.

Price of bond is present value of coupon payment plus present value of par value.

Answered: Its years ago, you boughta 10-year, 6%…

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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A. (1) Suppose that you have a bond with a face value of $1,000 and a coupon rate of 8% for one year and that you buy another one after one year. What will be your gain if the interest rate increases up to 10%? (2) Suppose that the expectations theory is true and that you can buy a three-year bond with an interest rate of 6% or three consecutive one-year bonds with interest rates of 4%, 5%, and 6%. Which option would you choose to undertake? Why? (3) One-year T-bill rates over the next five years are expected to be 4%, 5%, 6%, 6.5%, and 8%. If five-year T-bonds are yielding 13%, what is the liquidity premium on this bond?
You just bought a bond (M=$1000, CR=10%, n=20 years, semiannual coupon pay yielding 10.5%. If you sell the bond one year from today when the yield is 9.75%, what would be your realized (actual) rate of return (before-tax)? 16.996%
You just bought a newly issued bond which has a face value of $1,000 and pays its coupon once annually. Its coupon rate is 6%, maturity is 20 years and the yield to maturity for the bond is currently 8%. Suppose that one year after you bought the bond, the yield to maturity of the bond declines to 7%. Find the (before-tax) total dollar return (dollar returns from the coupon payment and capital gains) for the one-year investment period.
a. You purchased a new issue GE Corp bond. The bond has a face valueof $100, coupon interest rate of 4%, and a maturity of 10 years. Four(4) years later you sell the bond in the secondary market; however,market interest rates for bonds of equal risk and maturity are now3.5%. Calculate the selling price of your bond. b.Calculate the Annualized Holding Period Return (HPR) on thisinvestment that was held for 4 years.
Please show work You want to purchase a bond that will pay you $300 per year for the next four years. If the annual interest rate is 4%, then what is the price of your bond if the market is in equilibrium? You buy a stock that is expected to pay a dividend of $300 per year for the next four years. If the discount rate is 5.5%, then what is the stock price in this case? Is this result the one you would expect when comparing this answer to the one you obtained in question 3? Why or why not?
4. You bought a 10-year, 5% coupon bond for $1,000 and sold it 1 year later for $1,100. What is the rate of return on your investment if the bond pays interest annually? If your marginal tax rate is 30%, and 50% of capital gains are taxable, what is the after-tax rate of return on your bond investment?
YOUR BANK is thinking to issue a regular coupon bond (debenture) with the following particulars: Maturity = 3 years, Coupon rate = 9%, Face value = $1,500, Coupon payments are annual and paid at the end of a year. In the fixed-income securities market, the yield curve for the bond similar to the one issued by YOUR BANK is flat and it is 7.500% per annum continuously compounded. As per you, what should be the issue (offer) price per bond of YOUR BANK in US dollars?
Suppose the investor sells his bonds before maturity and uses some of the proceeds to purchase a zero-coupon T-Bill with a $100 face value and 6-month maturity. What is the effective annual rate (EAR) if it was purchased for $95.52?
Micro Spinoffs, Inc., issued 20-year debt a year ago at par value with a coupon rate of 8%, paid annually. Today, the debt is selling at $1,100. If the firm's tax bracket is 20%, what is its after-tax cost of debt? (Do not round intermediate calculations. Round your answer to 2 decimal places.) After-tax cost of debt
Fixed Income Securities4. Today is t = 0. You have just bought a five-year zero-coupon Treasurybond with $100 face value. You paid $80.(a) What is the annually compounded yield to maturity on the bond?(b) Suppose that yields at all maturities decrease to 2% immediately after you havepurchased the bond. Calculate the annualized holding period return if you sellthe bond one year after you have purchased it, at t = 1.(c) What is the annually compounded yield to maturity on the bond at t = 1?
3. Three years ago you purchased a bond for $850 with an original maturity of 10 years, a coupon rate of 8% (paid annually), and a $1,000 par value. Back then your required return was 10%. Now, 3 years later you want to sell the bond, but rates have increased and you can sell it for only $817.45. a. What is your holding period return (realized yield) over this 3-yr period? A timeline might help. b. Calculate the price of the bond 8 years after it was originally issued assuming the required return on the bond at T-8 is 11%. HINT: Draw a timeline.
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