One month ago, an investor entered into a forward agreement to sell a bond in three months' time at a price of $100. The current spot price for the bond is $101.50. Suppose the term structure of interest rates is such that the 1-month spot rate is 2%, the 2-month spot rate is 4% and the 3-month spot rate is 6%. Assume all interest rates are based on continuous compounding. a. Given the above information, what is the value of the investor's position assuming the bond does not pay a coupon? b. Suppose instead the bond pays a 5% coupon and the next coupon payment is one month from today. In that event, what is the value of the investor's position?

One month ago, an investor entered into a forward agreement to sell a bond in three months' time at a price of $100. The current spot price for the bond is $101.50. Suppose the term structure of interest rates is such that the 1-month spot rate is 2%, the 2-month spot rate is 4% and the 3-month spot rate is 6%. Assume all interest rates are based on continuous compounding. a. Given the above information, what is the value of the investor's position assuming the bond does not pay a coupon? b. Suppose instead the bond pays a 5% coupon and the next coupon payment is one month from today. In that event, what is the value of the investor's position?

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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You observe two most recently issued securities: 6-month T-Bill (zero coupon) with yield 5.25% p.a., and 2-year T-Note with coupon rate of 6% p.a. are selling at par of 100. All bonds in the market are semi-annual payments. Using this information to answer questions 19-20. Which of the following information would be incorrect?A. The current 6-month spot rate is 5.25% p.a.B. The yield to maturity of 2-year T-note is 6% p.a.C. The correct market price of 1-year Treasury note with par of 100 and coupon rate of 5.5% should be about 100.D. The spot rate in 1.5-year’s time should be 5.75% p.a.
An investor purchased the following five bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 6%. What is the percentage change in price for each bond after the decline in interest rates? Fill in the following table. Enter all amounts as positive numbers. Do not round intermediate calculations. Round your monetary answers to the nearest cent and percentage answers to two decimal places. Percentage Change 10-year, 10% annual coupon 10-year zero 5-year zero 30-year zero $100 perpetuity Price @ 8% $ Price @ 6% $ %
The interest rate on one-year Treasury bonds is 0.8 percent, the rate on two-year T-bonds is 0.9 percent, and the rate on three-year T-bonds is 1.0 percent. Using the expectations theory, compute the expected one-year interest rate in the second year (Year 2 only). Round your answer to one decimal place. % Using the expectations theory, compute the expected one-year interest rate in the third year (Year 3 only). Round your answer to one decimal place. %
Assume that a 5-year bond pays interest of $90 once a year (1 payment / year) and will mature for $1,000. Also assume that the yield to maturity on this bond is currently 10 percent. Given this information, determine the duration of this bond. Enter your answer in decimal format, truncated to 2 decimal places. For example, if your answer is 7.1186 years, enter "7.11".
An investor purchased the following five bonds. Each bond had a par value of $1,000 and a 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 7%. What is the percentage change in price for each bond after the decline in interest rates? Fill in the following table. Enter all amounts as positive numbers. Do not round intermediate calculations. Round your monetary answers to the nearest cent and percentage answers to two decimal places. Please see image I am not sure if this counts as one question but it is one in the book.
An insurance company is thinking about purchasing bonds A and B with zero coupons to cover some of its future liabilities. The redemption periods for these zero-coupon bonds are seven and twenty years, respectively.£11 million is due in 11 years, and £14 million is due in 16 years, according to the list of its liabilities.Determine bond B's value at an effective 5% annual interest rate so that Redington's theory of immunization's first two requirements are met. (correct answer=6.419) (using formulas, no tables)
A bond with a face value of $1,000 was issued at par (sold for its face value) 5 years ago when market interest rates were 3.6% p.a. (compounded annually). It now has exactly 3 years remaining until it matures. If it pays coupon interest annually, and current market rates are 2.4% p.a. (B.E.Y. convention – all maturities), calculate the duration of the bond.
"A Company has a bond outstanding with a face value of $1000 that reaches maturity in 4 years. The bond certificate indicates that the stated coupon rate for this bond is 2.9% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the bond is 6%, then the price that this bond trades for will be closest to__________.
An insurance company is analyzing the following three bonds, each with five years to maturity, annual interest payments, and is using duration as its measure of interest rate risk. What is the duration of each of the three bonds? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16)) a. $10,000 par value, coupon rate=9.7%, r 0.17 b. $10,000 par value, coupon rate 11.7%, r= 0.17 c. $10,000 par value, coupon rate = 13.7%, p=0.17 Duration of the bond years
A fixed-interest instrument is repaid at par in precisely eight years and pays coupons at a rate of four percent yearly in arrears.Determine the bond's DISCOUNTED MEAN TERM (DMT) (in years) at an effective interest rate of 6% annually. Correct answer= 6.9209 (using formulas, no tables)
Bhupatbhai
Suppose that a bank has agreed to the following terms of an interest rate swap: - The notional principal is CAD 300 million and the remaining life of the swap is 11 months. - The bank pays 8% per annum, and receives three-month LIBOR. - Payments are exchanged every three months. - The swap (fixed) rate is 11% per annum for all maturities. - The three-month LIBOR rate a month ago was 12.5% per annum. All rates are compounded quarterly. Estimate the value of the swap using a) a bond-price valuation method, and b) a FRAS-based method?

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