The following bond is often described as a "deep discount," "zero coupon" or "strip" because the bond does not pay semi-annual interest to the holder, instead, the interest is implied to be generated and then re-invested in the security so the maturity value is a much larger amount. -35,000 100,000 1... 39 40 semi-annual periods (1) Please calculate the nominal Yield to Maturity on this bond. (2) Moving forward five full years, if market interest rates moved to 4%, what would be the value of this strip? (3) Same timing assumption as #2, if market interest rates moved to 8%, what would be the value of this strip?
The following bond is often described as a "deep discount," "zero coupon" or "strip" because the bond does not pay semi-annual interest to the holder, instead, the interest is implied to be generated and then re-invested in the security so the maturity value is a much larger amount. -35,000 100,000 1... 39 40 semi-annual periods (1) Please calculate the nominal Yield to Maturity on this bond. (2) Moving forward five full years, if market interest rates moved to 4%, what would be the value of this strip? (3) Same timing assumption as #2, if market interest rates moved to 8%, what would be the value of this strip?
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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Transcribed Image Text:The following bond is often described as a "deep discount," "zero coupon" or "strip" because
the bond does not pay semi-annual interest to the holder, instead, the interest is implied to be
generated and then re-invested in the security so the maturity value is a much larger amount.
-35,000
100,000
1...
39
40 semi-annual periods
(1) Please calculate the nominal Yield to Maturity on this bond.
(2) Moving forward five full years, if market interest rates moved to 4%, what would be the
value of this strip?
(3) Same timing assumption as #2, if market interest rates moved to 8%, what would be
the value of this strip?
Expert Solution
Step 1
Deep discount or zero coupon bond doesn't pay any interest unlike corporate bonds. zero coupon bonds are issued at a very low value and face value of the bond is paid at maturity. the difference between issue price and face value is the interest. US treasury bill is an example of zero coupon bond.
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