Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 10.0%, but she expects them to fall to 8.0% within a year. As a result, Stacy is thinking about buying either a 25-year, zero-coupon bond or a 20-year, 8.5% bond. (Both bonds have $1,000 par values and carry the same agency rating.) Assuming that Stacy wants to maximize capital gains, which of the two issues should she select? What if she wants to maximize the total return (interest income and capital gains) from her investment? Why did one issue provide better capital gains than the other?
Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 10.0%, but she expects them to fall to 8.0% within a year. As a result, Stacy is thinking about buying either a 25-year, zero-coupon bond or a 20-year, 8.5% bond. (Both bonds have $1,000 par values and carry the same agency rating.) Assuming that Stacy wants to maximize capital gains, which of the two issues should she select? What if she wants to maximize the total return (interest income and capital gains) from her investment? Why did one issue provide better capital gains than the other?
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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Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at
capital gains than the other? Based on the duration of each bond, which one should be more price volatile?
10.0%,
but she expects them to fall to
8.0%
within a year. As a result, Stacy is thinking about buying either a 25-year, zero-coupon bond or a 20-year,
8.5%
bond. (Both bonds have $1,000 par values and carry the same agency rating.) Assuming that Stacy wants to maximize capital gains, which of the two issues should she select? What if she wants to maximize the total return (interest income and capital gains) from her investment? Why did one issue provide better The capital gain of the zero-coupon bond is
$65.4065.40.
(Round to the nearest cent.)The capital gain of the coupon-bearing bond is
$nothing.
(Round to the nearest cent.)Expert Solution
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