QUESTION THREE You are considering purchasing a 20-year, $100, 12% coupon, bond, interest on which will be paid at the end of the year. Its owner has already received the fourth year's interest payment. What is the maximum price at which you should buy the bond today if you can get 10% on your money from an alternative investment that has the same risk?

QUESTION THREE You are considering purchasing a 20-year, $100, 12% coupon, bond, interest on which will be paid at the end of the year. Its owner has already received the fourth year's interest payment. What is the maximum price at which you should buy the bond today if you can get 10% on your money from an alternative investment that has the same risk?

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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Suppose you purchase a 10-year bond with 6.3% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 4.6% when you purchased and sold the bond, A)What cash flows will you pay and receive from your investment in the bond per $100 face value? B)What is the annual rate of return of your investment?
You are considering investing in a zero coupon bond that will pay you its face value of$1000 in ten years. If the bond is currently selling for $485.20, whag is the IRR for investing in this bond?
Question 8 You owe $40,000 in 2 years' time. Annualised yields are 7% at all horizons. There is a 1-year zero-coupon bond, and a 5-year annuity paying $4 per year. To the nearest cent, how much should you invest in the 1-year bond and 5-year annuity to immunise yourself against interest rate risk?
Please answer problem 4!! just giving you problem 3 for the info on it Problem 3 You observe that The James Company Inc. issued a $10 trillion 7 year bond 5 and a half years ago. The bond pays its 7 percent coupon semi-annually. If the current market interest rates are 5.5 percent, what will a bond from the James Company sell for in the market today? What is the current yield on this bond? Problem 4 You bought the James bond from problem 3 when the bond was first issued for a quoted price of 99.25. If you sell the bond today, what is the effective annual holding period return that you earned on your investment? Show your work and your time line.
QUESTION 2.b Consider you are ready to make your first investment in the following three investment alternatives: Alternative 1: Maxis bond that pays 10% on its par value in interest, sells for RM850, and matures in 12 years. For bonds of this risk class, you believe that a 12% rate of return should be required. Alternative 2: Axiata preferred stock paying a dividend of RM6 and selling for RM40. Your required rate of return is 14% Alternative 3: Digi common stock selling for RM50. The stock recently paid a RM5 dividend. The company’s return on equity is 16% and the company keeps 60% of the profits for reinvestment. You think a reasonable required rate of return for the stock is 18%. Required: b. Based your answer in (a) choose the best alternative(s) for your investment and provide the reason.Note: No need excle formula , thank you
QUESTION 2 • The following two investment options are viewed under an annual effective interest rate of i. Investment A is a 10-year zero coupon bond which redeems at par-value 250. Investment B is a perpetuity-immediate paying an annual payment starting with 4 and having each successive payment increase by K% from the previous payment. • If the volatility of each investment is 8, then find the value of K. Give your answer as a decimal rounded to two places (i.e. X.XX)...i.e. if your answer was K% = 2.54%, you would answer 2.54. ||
Part B: At t=0, you purchase a four-year, 5 percent coupon bond (paid annually) that is priced to yield 6 percent continuously compounded (YTM = 6% continuously compounded). The face value of the bond is $1,000. The bond issuer is the U.S. government (no liquidity risk). You are also given that your holding period (investment horizon) equals to 3.70 years (t=T=3.70 years). Suppose that the market interest rate changes to 5.50 percent continuously compounded during the first year of your purchase (within year 1), and it remains at that level for the remaining life of the bond. Assume that, the reinvestment rate for the first coupon payment is the new interest rate that is, 5.50 percent continuously compounded. In addition, you will reinvest the coupor payments in a zero-coupon bond. What is your continuously compounded Holding Period Return of your investment at the end of your investment horizon (t=3.70) years? (Round-off to four decimal places, to obtain as accurate answer as possible…
A short question 4) You are managing a portfolio of $1 million. Your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with maturity of 5 years, and a perpetuity*, each currently yielding 5%. a. How much of each bond will you hold in your portfolio? b. How will these ratios change next year if target duration is now 9 years? *: Perpetuity: a specal case of annuity, where n-> Inf, thus the maturity of the instrument is perpetual.
Consider a long-term, zero coupon bond that has a face value of $100,000 and matures in thirteen years. If you require a return of 4.52%, what are you willing to pay for the instrument today? $56,286.96 $53,852.81 $95,675.47 $177,661.05
7. BCE bond has 10 years until maturity and a coupon rate of 8% payable annually, and sells for $1,100. a. If the BCE bond in problem 6 has a yield to maturity of 8% 1 year from now, what will its price be? (Round your answer to the nearest whole dollar.) b. What will be your rate of return if you buy it today and sell it in one year? (Round your answer to 2 decimal places. Use minus sign to enter negative rate of return, if any.) c. If the inflation rate during the year is 3%, what is the real rate of return on the bond? (Round your answer to 2 decimal places. Use minus sign to enter negative rate of return, if any.)
What is the expected annual return over four years for the second strategy? Information from prior: An investor is presented with the following two alternative strategies: (1) Purchase a 4-year bond with an interest rate of 8.45% and hold it until maturity, or (2) purchase a 1-year bond with an interest rate of 8.00% and when it matures, purchase another 1-year bond with an expected rate of 7.75% and when that matures, purchase another 1-year bond with an interest rate of 7.50%. The investor can purchase a fourth 1-year bond with an interest rate of 9.00%.
Consider a 25-year coupon bond which has a face value of $500 and a 5% coupon rate. Its current price is $500. The interest on this bond is expected to go up from 5% to 10% next year. a) Calculate the current yield of this 25-year coupon bond. b) Using the coupon bond pricing formula, calculate the expected price at which this bond will be sold next year. c) Calculate the expected rate of return if you buy the bond today and sell it next year. d) Are you going to invest on this bond if your investment horizon is just one year? Explain why or why not.

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