Problem 2 (20 points): You own a $1,000-par zero-coupon bond that has 5 years of remaining maturity. You plan on selling the bond in one year and believe that the required yield next year will have the following probability distribution in the table highlighted in yellow color. 2a (7.5 points). What is your expected price when you sell the bond? 2b (7.5 points). What is the standard deviation? Solution: The expected price is: The standard deviation is: Probability Required Yield Price Prob * Price Prob* (Price - Exp. Price)² 0.1 6.60% 0.2 6.75% 0.4 7.00% 0.2 7.20% 0.1 7.45%

Problem 2 (20 points): You own a $1,000-par zero-coupon bond that has 5 years of remaining maturity. You plan on selling the bond in one year and believe that the required yield next year will have the following probability distribution in the table highlighted in yellow color. 2a (7.5 points). What is your expected price when you sell the bond? 2b (7.5 points). What is the standard deviation? Solution: The expected price is: The standard deviation is: Probability Required Yield Price Prob * Price Prob* (Price - Exp. Price)² 0.1 6.60% 0.2 6.75% 0.4 7.00% 0.2 7.20% 0.1 7.45%

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 8MC: Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for...

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Question

I must use formulas and cell references PV of Payments when computing all values in the green cells

You own a $1,000-par zero-coupon bond that has 5 years of remaining maturity.
You plan on selling the bond in one year and believe that the required yield next year will have the following probability distribution in the table highlighted in yellow color.
2a (7.5 points). What is your expected price when you sell the bond?
2b (7.5 points). What is the standard deviation?

Problem 2 (20 points): You own a $1,000-par zero-coupon bond that has 5 years of remaining maturity.
You plan on selling the bond in one year and believe that the required yield next year will have the following probability distribution in the table highlighted in yellow color.
2a (7.5 points). What is your expected price when you sell the bond?
2b (7.5 points). What is the standard deviation?
Solution:
The expected price is:
The standard deviation is:
Probability
Required Yield
Price
Prob * Price
Prob* (Price - Exp. Price)²
0.1
6.60%
0.2
6.75%
0.4
7.00%
0.2
7.20%
0.1
7.45%

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