You have $25 million to invest in only one of two bonds in the market labeled Bond A and Bond B. BOND A: Zero-coupon, market yield 6%, maturity 8 years BOND B: Coupon rate 6%, market yield 6%, maturity 10 years. Assume you have an investment horizon of one year. Your expectation is that in exactly one year, the market yields on both bands will decline from 6% to 3% and you plan on selling the bond at that time. You wish to invest in only one of the two bonds. a.How much are you willing to pay for each bond? b.Which bond would you invest in given your investment horizon and your expectations about the yields on the bonds? Assume your marginal tax rate is 36%. SHOW METHODOLOGY.

You have $25 million to invest in only one of two bonds in the market labeled Bond A and Bond B. BOND A: Zero-coupon, market yield 6%, maturity 8 years BOND B: Coupon rate 6%, market yield 6%, maturity 10 years. Assume you have an investment horizon of one year. Your expectation is that in exactly one year, the market yields on both bands will decline from 6% to 3% and you plan on selling the bond at that time. You wish to invest in only one of the two bonds. a.How much are you willing to pay for each bond? b.Which bond would you invest in given your investment horizon and your expectations about the yields on the bonds? Assume your marginal tax rate is 36%. SHOW METHODOLOGY.

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

Debenture Valuation

A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.

Note Valuation

It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:

Question

You have $25 million to invest in only one of
two bonds in the market labeled Bond A and
Bond B.
BOND A: Zero-coupon, market yield 6%,
maturity 8 years
BOND B: Coupon rate 6%, market yield 6%,
maturity 10 years.
Assume you have an investment horizon of
one year. Your expectation is that in exactly
one year, the market yields on both bands will
decline from 6% to 3% and you plan on selling
the bond at that time. You wish to invest in
only one of the two bonds.
a.How much are you willing to pay for each
bond?
b.Which bond would you invest in given your
investment horizon and your expectations
about the yields on the bonds? Assume your
marginal tax rate is 36%. SHOW
METHODOLOGY.

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