Suppose we have a 5-year investment horizon and we consider a 10-year 12% coupon bond with face value of $1,000. The yield to maturity of the 10-year bond right now is 10%. The future required yield on the bond 5 years from today is 9%. The bond makes semi-annual coupon payments. Our reinvestment rate for the next 5 years is assumed to be 9%. What is the total return over the investment horizon?

Suppose we have a 5-year investment horizon and we consider a 10-year 12% coupon bond with face value of $1,000. The yield to maturity of the 10-year bond right now is 10%. The future required yield on the bond 5 years from today is 9%. The bond makes semi-annual coupon payments. Our reinvestment rate for the next 5 years is assumed to be 9%. What is the total return over the investment horizon?

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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If you purchased a bond one year ago for $1000 and just sold it for $1100 after receiving the $50 annual coupon payment, then what was your real return on the investment if theinflation rate was 2.1% for the same year?
The real risk-free rate is 2.5% and inflation is expected to be 2.25% for the next 2 years. A 2-year Treasury security yields 6.75%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place. ______%
Suppose you purchase a 10-year bond with 6% 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 4.01% 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 internal rate of return of your investment? Note: Assume annual compounding. The cash flow at time 1-3 is $ (Round to the nearest cent. Enter a cash outflow as a negative number.) (Round to the nearest cent. Enter a cash outflow as a negative number.) The cash outflow at time 0 is $ The total cash flow at time 4 (after the fourth coupon) is $ negative number.) b. What is the internal rate of return of your investment? (Round to the nearest cent. Enter a cash outflow as a
After careful consideration, you decide that you want to diversify your portfolio and invest in the bonds of HCA Healthcare. The bonds pay interest annually, will mature in 25 years, and have a coupon rate of 4% on a face value of $1,000. Currently, the bonds are selling for $910. If you are looking for a required return of 7% for this bond, what is the highest price you would be willing to pay?What is the current yield of these bonds?What is the yield to maturity on these bonds if you purchase them at the current price? (Use the Rate function) If you hold the bonds for two years, and interest rates do not change, what total rate of return will you earn, assuming that you pay the market price? If the bonds can be called in 4 years with a call premium of 6% of the face value, what is the yield to call?
Assume you can buy a bond that has a par value of $1000, matures in 10 years, yielding 6% and has a duration of 5. If you would like to use this bond to form a guaranteed investment contract “GIC” and offer a guaranteed rate of return to investors for certain years. a. what is the maximum yield you can offer? Why? Explain. b. For how many years would you make the guarantee? Explain.
Suppose that you bought a 14% Drexler bond with time to maturity of 9 years for $1,379.75 (semiannual coupons, interest rate=8%). After another ½ year, you sold the bond. Assuming that the required rate of return remained at 8%, what would the selling price be? What is the rate of return from this investment? If the interest rate dropped by 25 basis points, what would the selling price be? What would the rate of return from this investment be?
You plan to buy an 8% coupon 8-year maturity bond when market rate of return of similar bond is 10%. a) Calculate the proper price for this bond. b) TWO years later, the market rate has changed to 9% and the price of your bond has also changed accordingly. If you sell this bond at the market price, what is the ANNUAL rate of return from your investment in this bond? c) What will be your real rate of return over the two years if inflation rate is 3% in the first year and 5% in the second?
How much would you pay for a zero coupon bond with a par value of $1000, a maturity of 21 years, if your required rate of return is 6.1%? Assume annual discounting. (Round your answer to the nearest penny.)
Assume that the Pure Expectations Theory of the term structure is correct. Also assume that the interest rate today on a 9-year security is 6.40%, while the interest rate today on a 15-year security is 8.00%. Finally assume that the interest rate on a 3-year security to be bought at Year 9 and held over Years 10, 11, and 12 is 6.80%. Given this information, determine the average annual return that investors today must expect that they will receive from investing in a 3-year security in 12 Years (that is, buying the security at Year 12 and holding it over Years 13, 14, and 15). O 13.00% O 12.50% 13.50% O 12.00% O 14.00%
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?
Bond X is noncallable and has 20 years to maturity, an 11% annual coupon, and a $1,000 par value. Your required return on Bond X is 10%; if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 10.5%. How much should you be willing to pay for Bond X today? (Hint: You will need to know how much the bond will worth at the end of 5 years.) Do not round Intermediate calculations. Round your answer to the nearest cent. $
The real risk-free rate is 2%, and inflation is expected to be 2% for the next 2 years. A 2-year Treasury security yields 5.0%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place.

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