a.
To determine: The prices of zero coupon bonds, 8% and 10% coupon bonds at maturity
Introduction: The bonds are the units of debt issued incorporate and it is securitized as a trade asset. The price of the bonds is inversely proportional to the interest rates. Bonds are referred to as an instrument for getting fixed income.
a.
Answer to Problem 10PS
The prices of zero coupon bonds, 8% and 10% coupon bondsat maturity are $463.19, $1,000 and $1,134.20 respectively
Explanation of Solution
Given Information: The
The
Holding period return is the total value yield on an investment during the time it is held.
r= rate of return
T= the maturity period
(i)At zero coupon bond, the price is,
So, the price of zero coupon bond is $463.19
(ii)Calculate the price of coupon bond (8%),
So, the coupon bond price (8%) is $1,000
(iii)Calculate the price of coupon bond (10%),
So, the coupon bond price (10%) is $1,134.20
b.
To determine: The price of each bond.
Introduction: The bonds are the units of debt issued incorporate and it is securitized as a trade asset. The price of the bonds is inversely proportional to the interest rates. Bonds are referred to as an instrument for getting fixed income.
b.
Answer to Problem 10PS
The prices of zero coupon bonds, 8% and 10% coupon bonds are $500.25, $1,000 and $1,124.94 respectively
Explanation of Solution
Given Information: The rate of return, maturity period is given
The bond price is the discounted value of future cash flow in the current period. It is the sum assured of the current values of all. The price of the bond value is contradictory to the yield to maturity. Bonds are traded at a price of different face value as the time lapses.
Holding period return is the total value yield on an investment during the time it is held.
r= rate of return
T= the maturity period
(i)At zero coupon bond, the price is,
So, the price of zero coupon bonds is $500.25
(ii) Calculate the price of coupon bond (8%)
So, the coupon bond price (8%) is $1,000
(iii) Calculate the price of coupon bond (10%),
So, the coupon bond price (10%) is $1,124.94
c.
To determine: The before tax holding period return on each
Introduction: The bonds are the units of debt issued incorporate and it is securitized as a trade asset. The price of the bonds is inversely proportional to the interest rates. : Bonds are referred to as an instrument for getting fixed income.
c.
Answer to Problem 10PS
The before tax holding period return on each stock is shown in table.
Explanation of Solution
Given Information: The rate of return, maturity period is given
The bond price is the discounted value of future cash flow in the current period. It is the sum assured of the current values of all. The price of the bond value is contradictory to the yield to maturity. Bonds are traded at a price of different face value as the time lapses.
Holding period return is the total value yield on an investment during the time it is held.
Calculation of the pre tax rate of return,
| ZERO COUPON BOND | 8% COUPON BOND | 10% COUPON BONDS | |
| PRICE AFTER 1 YEAR | 500.25 | 1000 | 1124.94 |
| PRICE AT 10 YEARS | 463.19 | 1000 | 1134.2 |
| CHANGE IN PRICE | 37.06 | 0 | -9.26 |
| COUPON INCOME | 0 | 80 | 100 |
| PRE-TAX INCOME(PRICE+COUPON) | 37.06 | 80 | 90.74 |
| PRE-TAX RATE OF RETURN | 8.00% | 8.00% | 8.00% |
d.
To determine: The after tax holding period return on each
Introduction: The bonds are the units of debt issued incorporate and it is securitized as a trade asset. The price of the bonds is inversely proportional to the interest rates. : Bonds are referred to as an instrument for getting fixed income.
d.
Answer to Problem 10PS
The after tax holding period return on each is shown in table
Explanation of Solution
Given Information: The rate of return, maturity period is given
The bond price is the discounted value of future cash flow in the current period. It is the sum assured of the current values of all. The price of the bond value is contradictory to the yield to maturity. Bonds are traded at a price of different face value as the time lapses.
Holding period return is the total value yield on an investment during the time it is held.
Calculate the after tax of return,
| ZERO COUPON BOND | 8% COUPON BOND | 10% COUPON BONDS | |
| TAXES | 7.412 | 24 | 28.148 |
| AFTER TAX INCOME | 29.92 | 56 | 62.59 |
| AFTER TAX RATE OF INTEREST | 6.46% | 5.60% | 5.52% |
e.
To determine: The price of each bond with maturity of 7% at the beginning
Introduction: The bonds are the units of debt issued incorporate and it is securitized as a trade asset. The price of the bonds is inversely proportional to the interest rates. : Bonds are referred to as an instrument for getting fixed income.
e.
Answer to Problem 10PS
The prices of zero coupon bonds, 8% and 10% coupon bonds are $500.25, $1,000 and $1,124.94 respectively
Explanation of Solution
Given Information: The rate of return, maturity period is given
The bond price is the discounted value of future cash flow in the current period. It is the sum assured of the current values of all. The price of the bond value is contradictory to the yield to maturity. Bonds are traded at a price of different face value as the time lapses.
Holding period return is the total value yield on an investment during the time it is held.
r= rate of return
T= the maturity period
(i)At zero coupon bond, the price is,
So, the price of zero coupon bonds is $500.25
(ii)Calculate the price of coupon bond (8%)
So, the coupon bond price (8%) is $1,000
(iii)Calculate the price of coupon bond (10%),
So, the coupon bond price (10%) is $1,124.94
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Chapter 14 Solutions
Investments
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