US Treasury notes currently pay an effective annual rate (yield) of 4%. Your financial advisor offers you a savings product that his firm is selling for $1000 that matures in 4 years and pays $35 at the end of each year, plus the original $1000 at maturity (in other words, they are $1000 face value bond that pay a 3.5% coupon). If the savings product has the same risk as US treasuries, which is a better investment? What is the savings product's effective annual yield?

US Treasury notes currently pay an effective annual rate (yield) of 4%. Your financial advisor offers you a savings product that his firm is selling for $1000 that matures in 4 years and pays $35 at the end of each year, plus the original $1000 at maturity (in other words, they are $1000 face value bond that pay a 3.5% coupon). If the savings product has the same risk as US treasuries, which is a better investment? What is the savings product's effective annual yield?

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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Bonds often pay a coupon twice a year. For the valuation of bonds that make semiannual payments, the number of periods doubles, whereas the amount of cash flow decreases by half. Using the values of cash flows and number of periods, the valuation model is adjusted accordingly. Assume that a $1,000,000 par value, semiannual coupon US Treasury note with three years to maturity has a coupon rate of 6%. The yield to maturity (YTM) of the bond is 9.90%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: $567,545.29 $765,735.71 $900,865.54 $1,081,038.65 Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: Assuming that interest rates remain constant, the T-note’s price is expected to ( Increase, Decrease).
Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $31,950,000, with the promise to buy them back at a price of $32,000,000. a. Calculate the yield on the repo if it has a 5-day maturity. b. Calculate the yield on the repo if it has a 15-day maturity. (For all requirements, use 360 days in a year. Do not round intermediate calculations. Round your percentage answers to 5 decimal places. (e.g., 32.16161)) a. b. X Answer is complete but not entirely correct. Yield on the repo Yield on the repo 1.02857 % 0.34286 %
An insurance company must make payments to a customer of $10 million in one year and $5 million in five years. The yield curve is flat at 10%. Required: a. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What must be the face value and market value of that zero-coupon bond? Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. a. Maturity of zero coupon bond b. Face value b. Market value years million million
A Bank offers both loans and deposits at a nominal interest rate of 4% that is continuously compounded. What is the effective rate offered by the bank? The bank also offers a 3-year bond with face value £10000, redeemable at par, with 10% annual coupons. What is the final payment of that bond? Assuming there are no arbitrage opportunities, what is the price of the above bond? Give your answer to five valid digits.
X Co. want to raise $100 million of 5-year debt in the Euro-market where interest is paid annually. It can obtain a 5-yr floating rate note with an interest rate of 1-year LIBOR + 2%. The 1-year LIBOR rate is currently 5%. To hedge the interest rate risk X Co. plans to enter into a collar with a cap rate of 6% and a floor rate of 4%. The notional principal of both the cap and floor is $100 million. The cap premium is 1.4% of the notional principal and the floor premium is 0.5% of the notional premium. What is the worst case all-in-rate that X Co. will pay in total? Answer options: 5.8% 5.2% 9.2% 8.2% 7.2%
Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 10 years to maturity, and a coupon rate of 8.7 percent paid annually. If the YTM is 10.7 percent, what is the current bond price in euros? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Current bond price
You work at the NJ Treasury, you raise capital for government projects by issuing variable rate muni - bonds for 2 years maturity. You also know that you can offset your variable muni - bond risk by entering into an interest rate swap with Barclays. You enter into the following swap: You currently agree to pay LIBOR + 1% on the muni bond as coupon. In your swap you agree to pay 4.5% fixed and receive floating LIBOR + 2% Which of the following is true? Group of answer choices if LIBOR was fixed low, you received artificially high rates in the swap. if LIBOR was fixed high, Barclays would make artificially low payments in the swap. if LIBOR was fixed lower than 4.5%, you may have made unnecessary payments to Barclays. if LIBOR was fixed higher than 5%, Barclays would receive higher payments from you
Bonds often pay a coupon twice a year. For the valuation of bonds that make semiannual payments, the number of periods doubles, whereas the amount of cash flow decreases by half. Using the values of cash flows and number of periods, the valuation model is adjusted accordingly. Assume that a $1,000,000 par value, semiannual coupon US Treasury note with five years to maturity has a coupon rate of 6%. The yield to maturity (YTM) of the bond is 9.90%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: $534,907.72 $849,059.88 $1,018,871.86 $721,700.90 Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: The T-note described in this problem is selling at a .
An asset promises to pay the following: ▪ $60 each year for the next ten years: and ▪ $1,000 in ten years Assume all the cash flows are discounted by 6%. Use the annuity formula to get the price of the first part. Use the standard discounting formula to get the price of the second part. Add them together. This is a bond! It is described as paying a coupon rate of 60/1,000 = 6% (a coupon of 60), with a face value of 1,000 and a maturity of ten years. And its “yield-to-maturity” is 6%.
A Bank offers both loans and deposits at a nominal interest rate of 5% that is continuously compounded. (a) What is the effective rate offered by the bank? Give your answer to 3 digits. Do not write the % sign. For example, if your answer is 4.15% then write 4.15. Answer: (b) The bank also offers a 3-year bond with face value £10000, redeemable at par, with 10% annual coupons. What is the final payment of that bond? Do not enter the £ sign. Answer: (C) T sign. Answer: Assuming there are no arbitrage opportunities, what is the price of the above bond? Give your answer to five valid digits. Do not enter the £

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