a) What is a zero-coupon bond? What is the value of a zero-coupon bond with a par value of £100 thatmatures in 10 years with a yield to maturity of 5% per annum?b) The dirty price of an 8%, 2-year bond with a face value of £100 that pays annually purchased 50 daysafter a coupon date is £97.30. Answer the following questions with this information.(i) What is the accrued interest on this bond for 50 days?(ii) If you hold this bond to maturity, what is the annual capital gain as a percent of the cleanprice?S](iii) What is the yield to maturity for this bond? Hint: The yield on the bond is that discount ratethat makes the present value of the bond equal to its dirty price.c) The term structure of spot yields is given by the following scheduleMaturity (Years)Rate (per annum)0.72%12340.81%1.02%1.23%Answer the following questions:(i) What is the price of a £100, 4-year, 5% coupon bond?(ii) What is the yield to maturity of a £100, 2-year, 10% coupon bond?

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What is a zero-coupon bond? What is the value of a zero-coupon bond with a par value of £100 that matures in 10 years with a yield to maturity of 5% per annum?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 8MC: Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for...

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Concept explainers

Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.

Question

a) What is a zero-coupon bond? What is the value of a zero-coupon bond with a par value of £100 that
matures in 10 years with a yield to maturity of 5% per annum?
b) The dirty price of an 8%, 2-year bond with a face value of £100 that pays annually purchased 50 days
after a coupon date is £97.30. Answer the following questions with this information.
(i) What is the accrued interest on this bond for 50 days?
(ii) If you hold this bond to maturity, what is the annual capital gain as a percent of the clean
price?
S]
(iii) What is the yield to maturity for this bond? Hint: The yield on the bond is that discount rate
that makes the present value of the bond equal to its dirty price.
c) The term structure of spot yields is given by the following schedule
Maturity (Years)
Rate (per annum)
0.72%
1
2
3
4
0.81%
1.02%
1.23%
Answer the following questions:
(i) What is the price of a £100, 4-year, 5% coupon bond?
(ii) What is the yield to maturity of a £100, 2-year, 10% coupon bond?

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