You have been provided with the following options. a. A 10-year, R1000 face value, 10 percent coupon bond with semiannual interest payments. b. A 10-year, R1000 face value, 10 percent coupon bond with annual interest payments. C.A 10-year, R1000 face value, zero coupon bond. d. A 10-year R100 annuity. ) Determine which one poses the highest price risk

You have been provided with the following options. a. A 10-year, R1000 face value, 10 percent coupon bond with semiannual interest payments. b. A 10-year, R1000 face value, 10 percent coupon bond with annual interest payments. C.A 10-year, R1000 face value, zero coupon bond. d. A 10-year R100 annuity. ) Determine which one poses the highest price risk

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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Assume that the Pure Expectations Theory of the term structure is correct. Also assume that the interest rate today on a 9-year security is 6.40%, while the interest rate today on a 15-year security is 8.00%. Finally assume that the interest rate on a 3-year security to be bought at Year 9 and held over Years 10, 11, and 12 is 6.80%. Given this information, determine the average annual return that investors today must expect that they will receive from investing in a 3-year security in 12 Years (that is, buying the security at Year 12 and holding it over Years 13, 14, and 15). O 13.00% O 12.50% 13.50% O 12.00% O 14.00%
A firm considers to invest in two zero-coupon bonds (A and B) in order to cover for a selection of its future liabilities. These zero-coupon bonds will be redeemed in 7 years' and in 20 years' time, respectively. The given selection of its liabilities consist of £11 million due in 11 years' time and £14 million due in 16 years' time. Find the value of bond B at a rate of interest of 5% per annum effective such that the first two conditions for Redington's theory of immunisation are satisfied
Calculate the implied volatility on a security given the following information: a call option on the security has a premium of 3.5p, the security itself is trading at 50p, the call has an exercise price of 51p and has 120 days to maturity, and the riskless interest rate is 12 per cent. Calculate the implied volatility on a security given the following information: a call option on the security has a premium of 3.5p, the security itself is trading at 50p, the call has an exercise price of 51p and has 120 days to maturity, and the riskless interest rate is 12 per cent.
Assume that you are considering the purchase of a 30-year, noncallable bond with an annual coupon rate of 9.0%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 9.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
You must make a choice between the following three sets of non-callable bonds. Foreach set, select the bond that would be best for your portfolio, given your interest rate outlook and the consequent strategy set forth in Part a. In each case, briefly discuss why you selected the bond. Bond Maturity Coupon Yield to MaturitySet 1 A 20 years 10% 10% B 20 years 6% 8%Set 2 C 20 years 6% 10% D 15 years 8% 10%Set 3 E 17 years 12% 12% F 20 years 12% 8%
(B). An investor must choose between two options. The first option (A) offers AED 10m for AED 2m a year for 5 years. The second option (B) offers AED 11m of AED 1m a year for four years and AED 7m in year 5. (a). Compare the present value of each option by assuming a range of the required rate of return of the investor, say 8%, 9%, 10%, 11%, and 12%. What is your advice?
An insurance firm considers to invest in two zero-coupon bonds (A and B) in order to cover for a selection of its future liabilities. These zero-coupon bonds will be redeemed in 6 years' and in 20 years' time, respectively. The given selection of its liabilities consist of £10 million due in 8 years' time and £6 million due in 15 years' time. Find the value of bond B at a rate of interest of 8% per annum effective such that the first two conditions for Redington's theory of immunisation are satisfied
Suppose you purchase a zero coupon bond with a face value of $1000, maturing in 20 years, for $213.20. zero coupon bond pay the investor the face value on the maturity date. What is the implicit interest in the first year of the bond's life ?
You have the choice between a convertible bond and a non-convertible bond for investment. Both offer you a coupon rate of 2.5% per year with semi-annual compounding. The remaining maturity for both bonds is 7.5 years. The price for the non-convertible bond is 99.7. Would you pay more or less for the convertible bond? Why?
What is the expected annual return over four years for the second strategy? Information from prior: An investor is presented with the following two alternative strategies: (1) Purchase a 4-year bond with an interest rate of 8.45% and hold it until maturity, or (2) purchase a 1-year bond with an interest rate of 8.00% and when it matures, purchase another 1-year bond with an expected rate of 7.75% and when that matures, purchase another 1-year bond with an interest rate of 7.50%. The investor can purchase a fourth 1-year bond with an interest rate of 9.00%.

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