The Government just issued a 2-year coupon bond with a face value of $1,000 and annual coupons of $75. What is the expected price for the bond at year one (after the first coupon is paid)? Use the term structure of interest rates shown below to answer the question. Term Structure of Rates at Year 0 Term 1-year 2-years A. $1,010 B. $998 C. $992 D. $982 OE. $1,000 Spot Rate 6.5% 8%

The Government just issued a 2-year coupon bond with a face value of $1,000 and annual coupons of $75. What is the expected price for the bond at year one (after the first coupon is paid)? Use the term structure of interest rates shown below to answer the question. Term Structure of Rates at Year 0 Term 1-year 2-years A. $1,010 B. $998 C. $992 D. $982 OE. $1,000 Spot Rate 6.5% 8%

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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(i) If investors have demanded an interest rate of 5 percent on the bond investment, what is the maximum prices to pay for the 1-year bond and 30-year bond? (ii) Suppose that the interest rate has increased to 20%, calculate the values of the 1-yearbond and 30-year bond.(iii) Based on the calculations in parts (b) (i) and (ii) above, explain with reasons thefundamental relationship between interest rates and bond maturity. (iv) Briefly explain the meaning of the terms “bond’s coupon rate”, “current yield”, and“yield to maturity”. (v) Explain why bonds have protective covenants.
Question 2 (at home, to practice) Suppose the interest rate on a bond offered to investors by National Savings and Investments (a UK government bank) is 4% per year + inflation and the expected inflation rate in the UK for next year is 2.7%. A. What is the exact expected nominal interest rate for this bond next year? B. Using this numerical example, explain in your own words the difference between nominal interest rates and real interest rates. C. Assume this bond matures in five years and assume that the annual inflation rate is constant for the next five years. What would be the final payment at maturity for an investment of £120? 1
A plot of the yields on bonds with different terms to maturity but the same risk, liquidity, and tax considerations is known as O A. a yield curve. B. a risk-structure curve. OC. a term-structure curve. 5- O D. an interest-rate curve. Suppose people expect the interest rate on one-year bonds for each of the next four years to be 3%, 6%, 5%, and 6%. If the expectations theory of the term structure of interest rates is correct, then the implied interest rate on bonds with a maturity of four years is nearest whole number). %. (Round your response to the 2- Refer to the figure on your right. Suppose the expected interest rates on one-year bonds for each of the next four years are 4%, 5%, 6%, and 7%, respectively. 1. 1.) Use the line drawing tool (once) to plot the yield curve generated. 3 Term to Maturity in Years 2.) Use the point drawing tool to locate the interest rates on the next four years. 5. 3- Interest Rate .....
The interest rate on one-year Treasury bonds is 0.8 percent, the rate on two-year T-bonds is 0.9 percent, and the rate on three-year T-bonds is 1.0 percent. Using the expectations theory, compute the expected one-year interest rate in the second year (Year 2 only). Round your answer to one decimal place. % Using the expectations theory, compute the expected one-year interest rate in the third year (Year 3 only). Round your answer to one decimal place. %
A. you are offered to buy a 4 year coupon bond in the beginning of its 7th month on its third year for $963.94. its face value is $1,000 and its coupon rate is 5.172% per annum, with coupon paid at the end of each quarter . government bond rate now is 6.9%. a. is $963.94 a good price for you to buy it or not ? what is the fair price for the bond ? b. what is the yield if you buy at the price that you have been offered ? c. if the government bond rate suddenly goes down to 4.7%, what will be the fair value of the bond ? B. the company just paid $1.48 annual dividend and announce the plns to pay $1.54 next year . the dividend growthrate is expected to remain constant at the current level for the following 4 years and then settle at 3% per year , if you are planning to buy this stock in 2 years time, how much would you expect to pay for it if the required rate of return is 7% at the time of your purchase ? ( use two deciaml rounding )
Consider two bonds, a 3-year bond paying annual coupons at 5% and a 10-year bond also paying annual coupons at 5%. Coupons are paid annually (not semiannually). Both are currently trading at par (i.e., price = face value). A. What must be the current discount rate for these bonds? B. Suppose that the discount rate for these bonds suddenly rise to 9%. What is the new price of the 3-year bond? What is the new price of the 10-year bond? C. Compare the price changes (i.e., the current price of $1,000 vs. the new bond price from Part B) of two bonds. Determine whether long-term or short-term bonds are more sensitive to interest rate fluctuation.
Consider a bond (with par value = $1,000) paying a coupon rate of 10% per year semiannually when the market interest rate is only 4% per half-year. The bond has three years until maturity. Required: a. Find the bond's price today and six months from now after the next coupon is paid. b. What is the total (6-month) rate of return on the bond? Complete this question by entering your answers in the tabs below. Required A Required B Find the bond's price today and six months from now after the next coupon is paid. Note: Round your answers to 2 decimal places. Current price Price after six months $ $ 1,052.42 1,044.52
The prices of zero-coupon bonds with various maturities are given: maturity in years price 1 975.66 2 885.89 3 821.92 4 759.20 5 670.20 A) How could you construct a 1-year forward loan beginning in year 3? face value = ? rate of synthetic loan = ? B) How could you construct a 1-year forward loan beginning in year 4? face value = ? rate of synthetic loan = ?
3. The U.S. Government has a 20-year bond that matures 20 years from now and has a face value of $1,000. The bond has a coupon rate of 3.1% per year, paid semiannually. The yield on the bond is 8%. If coupons are reinvested at 3.6% per annum, then how much interest is earned on reinvested coupons over the life of the bond? Calculate the interest as a percentage of the total cash flows received by the bondholder. What is the amount of interest earned on reinvesting the coupons? $ (Round to the nearest cent.) What percentage of the total cash flows received by the bondholder is the interest earned on the reinvested coupons? % (Round to two decimal places.)
You are considering two bonds, AMD and BBS. Both bonds are selling at par and pay the same amount of interest of $120 annually. Bond AMD will mature in 5 years while bond BBS will mature in 6 years. If the YTM on these two bonds increases by 1%, what do you expect to happen to their bond prices? • A. Both bond prices will increase, but BBS will increase more than AMD. • B. Both bond prices will decrease, but BBS will decrease more than AMD. • C. Both bond prices will increaks, but AMD will increase more than BBS. D. Both bond prices will decrease, but AMD will decrease more than BBS. You observe the current yield curve as follows: r0.5=4%, r1=4.2%, r1.5=4.3%, and Г2=4.1%. What is the price of a T-note which has a coupon rate of 4%, 2 years to maturity, and $1,000 par? • A. $1,064.69 • B. $998.03 • C. $992.52 • D. $988.87 The interest rates on 3- and 2-year Treasuries are 2.35% and 2.20%, respectively. If you estimate that the 1-year expected spot rate in year 3 is 2.53%, what is…
Refer to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) increase from 8 to 10 percent. a. What is the bond price at 8 percent? Bond price b. What is the bond price at 10 percent? Bond price c. What would be your percentage return on the investment if you bought when rates were 8 percent and sold when rates were 10 percent? Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Return on investment % Loss
The following information is about the spot rates on Treasury securities and BBB corporate bond: Spot 1 Year Spot 2 Year Spot 3 Year Treasury 3% 4.75% 5.5% BBB Corporate Debt 7.5% 9.15% 10.5% Question: Using the implied forward rates, estimate the annual marginal default probability for the one-year BBB corporate debt in year 3?

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