Topic 2: Return measures2. Which of the following investments do you prefer?(a) Purchase a zero-coupon bond, which pays $1000 in ten years, for a price of $550.(b) Invest $550 for ten years in a bank savings account at a guaranteed annual interestrate of 5.5%.1
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Topic 2: Return measures
2. Which of the following investments do you prefer?
(a) Purchase a zero-coupon bond, which pays $1000 in ten years, for a price of $550.
(b) Invest $550 for ten years in a bank savings account at a guaranteed annual interest
rate of 5.5%.
1
Step by step
Solved in 2 steps with 2 images
- (Solving for i) You are considering investing in a security that will pay you $5,000 in 31 years. a. If the appropriate discount rate is 11 percent, what is the present value of this investment? (Round to the nearest cent.) b. Assume these investments sell for $1,680 in return for which you receive $5,000 in 31 years. What is the rate of return investors earn on this investment if they buy it for $1,680?(Related to Checkpoint 5.6) (Solving for i) You are considering investing in a security that will pay you $1,000 in 27 years. a. If the appropriate discount rate is 12 percent, what is the present value of this investment? b. Assume these investments sell for $515 in return for which you receive $1,000 in 27 years. What is the rate of return investors earn on this investment if they buy it for $515? a. If the appropriate discount rate is 12 percent, the present value of this investment is $nothing. (Round to the nearest cent.)which of the following investments that pay will $5000 in 12 years have a higher price today? A. The security that earns an interest rate it 8.25% B. The security that earns an interest rate of 5.50%?
- The US Govemment wanted to auction $600 million worth of 1-year Treasury Bills. Bids for $100 million worth of Treasury Bills were submitted on a non-competitive basis. Institution Amount Bidded Price Bank 1 $100 m $50 m $150 m $50 m $100 m $100 m $175 m 98.0 Bank 2 97.5 Bank 3 97.0 96.5 Bank 4 Bank 5 96.0 Bank 6 95.5 Bank 7 95.0 (a) Based on the competitive bids submitted, describe, using a table, how you determine the price: (i) (11 The stopped-out price The allocations to banks 4, 5 and 6(Related to Checkpoint 5.6) (Solving for i) You are considering investing in a security that will pay you $1,000 in 25 years. a. If the appropriate discount rate is 11 percent, what is the present value of this investment? b. Assume these investments sell for $259 in return for which you receive $1,000 in 25 years. What is the rate of return investors earn on this investment if they buy it for $259? a. If the appropriate discount rate is 11 percent, the present value of this investment is $nothing. (Round to the nearest cent.)(Related to Checkpoint 5.6) (Solving for ) You are considering investing in a security that will pay you $3,000 in 34 years. a. If the appropriate discount rate is 8 percent, what is the present value of this investment? b. Assume these investments sell for $773 in return for which you receive $3,000 in 34 years. What is the rate of return investors earn on this investment if they buy it for $773? a. If the appropriate discount rate is 8 percent, the present value of this investment is $ 219.13. (Round to the nearest cent.) b. The rate of return investors can earn on this investment if they buy it for $773 is %. (Round to two decimal places.)
- Which of the following investments that pay will $18,500 in 8 years will have a higher price today? The security that earns an interest rate of 8.50%. The security that earns an interest rate of 12.75%.Assume you have the following asset and liability in your Balance Sheet: Asset - Bond A Modified Duration = 2.6 years Value = RM1.5 million Liability - Bond B Modified Duration = 3.1 years Value = RM1.0 million a. Calculate the duration gap. b. What is the expected change in Net Worth if interest increases by 1%? c. What should or could you to achieve immunised balance sheet? Note: Please show all workings.(Related to Checkpoint 5.6) (Solving for ) You are considering investing in a security that will pay you $4,000 in 28 years a. If the appropriate discount rate is 12 percent, what is the present value of this investment? b. Assume these investments sell for $2,229 in return for which you receive $4,000 in 28 years. What is the rate of return investors earn on this investment if they buy it for $2,229?
- (Related to Checkpoint 5.6) (Solving for i) You are considering investing in a security that will pay you $4,000 in 26 years. a. If the appropriate discount rate is 12 percent, what is the present value of this investment? b. Assume these investments sell for $2,348 in return for which you receive $4,000 in 26 years. What is the rate of return investors earn on this investment if they buy it for $2,348? a. If the appropriate discount rate is 12 percent, the present value of this investment is $ (Round to the nearest cent.)What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns. Buy a stock for $30 a share, hold it for three years, and then sell it for $60 a share (the stock pays annual dividends of $2 a share). Buy a security for $40, hold it for two years, and then sell it for $100 (current income on this security is zero). Buy a one-year, 5 percent note for $1,000 (assume that the note has a $1,000 par value and that it will be held to maturity).Assume you have the following asset and liability in your Balance Sheet: Asset - Bond A Modified Duration = 2.6 years Value = RM1.5 million Liability - Bond B Modified Duration = 3.1 years Value = RM1.0 million a. Calculate the duration gap. b. What is the expected change in Net Worth if interest increases by 1%? Assume previous interest is 10% c. What should or could you to achieve immunised balance sheet? Note: Please show all workings.