EBK INVESTMENTS
EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
Question
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Chapter 14, Problem 10PS

a.

Summary Introduction

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.

Expert Solution
Check Mark

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 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.

  Price=t=1TCoupon (1+r)t+ParValue(1+r)t

r= rate of return

T= the maturity period

(i)At zero coupon bond, the price is,

  Price=ParValue (1+r)T=$1,000 (1+8%) 10=$1,0002.16=$463.19

So, the price of zero coupon bond is $463.19

(ii)Calculate the price of coupon bond (8%),

  Price=ParValue (1+r)T=$80 (1+8%)1+$80 (1+8%)2+$80 (1+8%)3+......+$80 (1+8%) 10=$74.074+$68.587+$63.506+.....+$500.248=$1,000

So, the coupon bond price (8%) is $1,000

(iii)Calculate the price of coupon bond (10%),

  Price=ParValue (1+r)T=$100 (1+8%)1+$100 (1+8%)2+$100 (1+8%)3+......+$100 (1+8%) 10=$92.592+$85.733+$79.383+.....+$509.512=$1,134.20

So, the coupon bond price (10%) is $1,134.20

b.

Summary Introduction

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.

Expert Solution
Check Mark

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.

  Price=t=1TCoupon (1+r)t+ParValue(1+r)t

r= rate of return

T= the maturity period

(i)At zero coupon bond, the price is,

  Price=ParValue (1+r)T=$1,000 (1+8%) 101=$1,0001.99=$500.25

So, the price of zero coupon bonds is $500.25

(ii) Calculate the price of coupon bond (8%)

  Price=ParValue (1+r)T=$80 (1+8%)1+$80 (1+8%)2+$80 (1+8%)3+......+$80 (1+8%) 101=$74.074+$68.587+$63.506+.....+$500.268=$1,000

So, the coupon bond price (8%) is $1,000

(iii) Calculate the price of coupon bond (10%),

  Price=ParValue (1+r)T=$100 (1+8%)1+$100 (1+8%)2+$100 (1+8%)3+......+$100 (1+8%) 101=$92.592+$85.733+$79.383+.....+$509.273=$1,124.94

So, the coupon bond price (10%) is $1,124.94

c.

Summary Introduction

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.

Expert Solution
Check Mark

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 BOND8% COUPON BOND10% COUPON BONDS
    PRICE AFTER 1 YEAR500.2510001124.94
    PRICE AT 10 YEARS463.1910001134.2
    CHANGE IN PRICE37.060-9.26
    COUPON INCOME080100
    PRE-TAX INCOME(PRICE+COUPON)37.068090.74
    PRE-TAX RATE OF RETURN8.00%8.00%8.00%

d.

Summary Introduction

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.

Expert Solution
Check Mark

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 BOND8% COUPON BOND10% COUPON BONDS
    TAXES7.4122428.148
    AFTER TAX INCOME29.925662.59
    AFTER TAX RATE OF INTEREST6.46%5.60%5.52%

e.

Summary Introduction

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.

Expert Solution
Check Mark

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.

  Price=t=1TCoupon (1+r)t+ParValue(1+r)t

r= rate of return

T= the maturity period

(i)At zero coupon bond, the price is,

  Price=ParValue (1+r)T=$1,000 (1+8%) 101=$1,0001.99=$500.25

So, the price of zero coupon bonds is $500.25

(ii)Calculate the price of coupon bond (8%)

  Price=ParValue (1+r)T=$80 (1+8%)1+$80 (1+8%)2+$80 (1+8%)3+......+$80 (1+8%) 101=$74.074+$68.587+$63.506+.....+$500.268=$1,000

So, the coupon bond price (8%) is $1,000

(iii)Calculate the price of coupon bond (10%),

  Price=ParValue (1+r)T=$100 (1+8%)1+$100 (1+8%)2+$100 (1+8%)3+......+$100 (1+8%) 101=$92.592+$85.733+$79.383+.....+$509.273=$1,124.94

So, the coupon bond price (10%) is $1,124.94

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