You are considering investing in a 20% coupon rate bond with the annual coupons, a three-year majority and a face value of $1000. You observe the following prices for discount or zero - coupon bonds with face value of $100 (STRIPS): Time to maturity 1 year 2 Years 3 Years Price 96.71 92.21 84.47 (a) What is the fair market price of the bond? (b) What is the yield to maturity of the bond? (c) What is the yield to maturity on the one year STRIP? (d) What is the yield to maturity on the two-year STRIP? (e) What is the yield to maturity on the three year STRIP? (f) What does the market expect the 1 year to be in 1 year from now? (g) What does the market expect the 1 year to be in 2 years from now? (h) What does the market expect the 2 years to be in 1 year from now?

You are considering investing in a 20% coupon rate bond with the annual coupons, a three-year majority and a face value of $1000. You observe the following prices for discount or zero - coupon bonds with face value of $100 (STRIPS): Time to maturity 1 year 2 Years 3 Years Price 96.71 92.21 84.47 (a) What is the fair market price of the bond? (b) What is the yield to maturity of the bond? (c) What is the yield to maturity on the one year STRIP? (d) What is the yield to maturity on the two-year STRIP? (e) What is the yield to maturity on the three year STRIP? (f) What does the market expect the 1 year to be in 1 year from now? (g) What does the market expect the 1 year to be in 2 years from now? (h) What does the market expect the 2 years to be in 1 year from now?

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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You are considering investing in a 20% coupon rate bond with the annual coupons, a three-year majority and a face value of $1000. You observe the following prices for discount or zero - coupon bonds with face value of $100 (STRIPS): Time to maturity 1 year 2 Years 3 Years Price 96.71 92.21 84.47 (a) What is the fair market price of the bond? (b) What is the yield to maturity of the bond? (c) What is the yield to maturity on the one-year STRIP? (d) What is the yield to maturity on the two-year STRIP? (e) What is the yield to maturity on the three-year STRIP? (f) What does the market expect the 1 year to be in 1 year from now? (g) What does the market expect the 1 year to be in 2 years from now? (h) What does the market expect the 2 years to be in 1 year from now?
You are considering investing in a 20% coupon rate bond with the annual coupons, a three-year majority and a face value of $1000. You observe the following prices for discount or zero - coupon bonds with face value of $100 (STRIPS): Time to maturity 1 year 2 Years 3 Years Price 96.71 92.21 84.47 (a) What is the fair market price of the bond? (b) What is the yield to maturity of the bond? (c) What is the yield to maturity on the one year STRIP? (d) What is the yield to maturity on the two-year STRIP? (e) What is the yield to maturity on the three year STRIP? (f) What does the market expect the 1 year to be in 1 year from now? (g) What does the market expect the 1 year to be in 2 years from now? (h) What does the market expect the 2 years to be in 1 year from now?
You have decided to invest in Bond x, an n-year bond with semi-annual coupons and the following characteristics: Par value is 1000 The ratio of the semi - annual coupon rate to the desired semi- annual yield rate, is 1.03125. The present value of the redemption value is 381.5. Given v=0.5889, what is the price of bond x ? A) 1,055 B) 1,072 C ) 1,073 D) 1,069 E) 1,044
Suppose you purchase a $1000 Face-Value Zero-Coupon Bond with maturity 30 years and yield to maturity 4% quoted with annual compounding. Show the bond cash flows on a time line and compute the current price of the bond Draw a graph to illustrate how the price of this bond will change as it gets closer to maturity – Price (on y axis) vs Time (on x axis). Why is a zero-coupon bond more sensitive to interest rate changes than similar coupon bearing bonds (2 or 3 sentences)?
Consider a semi-annual bond that has a par value of 100, a 15-year maturity, a 5% coupon rate. Monthly interest rate is 0.412%. (a) What is the price of the bond (without calculation)? And explain why you can determine the price of the bond without calculation? (b) Using answers from (a), calculate the modified duration of this bond. (c) Using answers from (a) and (b), suppose that the bond’s yield to maturity decreases to 3.5%. How much will the bond price increase by applying the duration rule?
Suppose that a 1-year zero-coupon bond with face value $100 currently sells at $90.44, while a 2-year zero sells at $82.64. You are considering the purchase of a 2-year-maturity bond making annual coupon payments. The face value of the bond is $100, and the coupon rate is 12% per year. Required: a. What is the yield to maturity of the 2-year zero? b. What is the yield to maturity of the 2-year coupon bond? c. What is the forward rate for the second year? d. If the expectations hypothesis is accepted, what are (1) the expected price of the coupon bond at the end of the first year and (2) the expected holding-period return on the coupon bond over the first year? e. Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis? Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Required E Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis?…
Answer this question using the Par Value formula and showing all work. You have been given the following information for an existing bond that provides coupon payments. Par Value: $2000 Coupon rate: 6% Maturity: 4 years Required rate of return: 6%. What is the Present Value (PV) of the bond? If the required rate of return by investors were 11% instead of 6%, what would the Present Value of the bond be? Look at the same Par Value $2,000 Same Coupon rate: 6% Maturity: 10 years Required rate of return: 7% What is the Present Value of the Bond now? Explain how the longer maturities and higher required rate of return by investors affects the bond valuation.
The current zero-coupon yield curve for risk-free bonds is as follows What is the price per $100 face value of a two-year, zero-coupon, risk-free bond? The price per $100 face value of the two-year, zero-coupon, risk-free bond is $ ____ (Round to the nearest cent.)
If you have a coupon bond, its face value is $1,000 and the coupon rate is 4%. Complete the following table, then calculate the rate of return for the bond. If you know that it was purchased at the nominal value, comment on the results. due date return at maturity the price 2 0.02 3 0.04 5 0.06 Present Value Annuity value % n value % n 0.961 0.02 2 1.97 0.02 2 0.925 0.04 2 1.89 0.04 2 0.889 0.04 3 2.78 0.04 3 0.906 0.02 5 4.71 0.02 5 0.747 0.06 5 4.21 0.06 5
An investor is considering purchasing a bond with a 5.25 percent coupon interest rate, a par value of $1,000, and a market price of $926.31. The bond will mature in nine years. Based on this information, answer the following questions: a. What is the bond's current yield? b. What is the bond's approximate yield to maturity? c. What is the bond's yield to maturity using a financial calculator? ... a. The bond's current yield is 5.67%. (Round to two decimal places.) b. The bond's approximate yield to maturity is 6.30 %. (Round to two decimal places.) c. Using a financial calculator, the bond's yield to maturity is %. (Round to two decimal places.)
Consider a bond with a face value of $1,000 that sells for an initial price of $700. It will pay no coupons for the first nine years and will then pay 11% coupons for the remaining 29 years. Choose an equation showing the relationship between the price of the bond, the coupon (in dollars), and the yield to maturity. O A. B. O C. O D. 700 = 700 = 700 = 700 = 110 110 9 (1+i)⁹ (1+i)⁹+1 + 110 + i) ⁹ + 1 (1 + 1,000 (1+i) 29-9 1,000 (1 + i) 9 +29 + +...+ 110 (1+i) 9+2 + 110 (1 + i)9+29-1 110 + (1 + i) ⁹ + 110 (1+i)9 +29 9+29-1 + 110 (1 + i)9 +29 + 1,000 (1+i) 9+29
Suppose that a 1-year zero-coupon bond with face value $100 currently sells at $89.75, while a 2-year zero sells at $79.88. You are considering the purchase of a 2-year-maturity bond making annual coupon payments. The face value of the bond is $100, and the coupon rate is 10% per year. Required: What is the yield to maturity of the 2-year zero? What is the yield to maturity of the 2-year coupon bond? What is the forward rate for the second year? If the expectations hypothesis is accepted, what are (1) the expected price of the coupon bond at the end of the first year and (2) the expected holding-period return on the coupon bond over the first year? Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis?