EBK INVESTMENTS
EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
Question
Book Icon
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

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
You are a fixed income analyst with an active investment in two bonds. X and Y. Bond X has a coupon rate of 9% and Bond Y has a 10% annual coupon. Both bonds have 5 years to maturity. The yield to maturity for both bonds is now 10%. If the required return rises by 14%, by what percentage will the price of the bond X change? Please provide complete details of the calculations (formula/steps) of the above question
Please answer required a,b
You want to invest in a risk-free investment for the next 3 years. You can invest in a 3-year zero coupon bond or you can invest in a 1-year zero coupon bond now, then in one year from now invest in a 2- year zero coupon bond. The spot interest rate on the 3-year bond is 3.25%. The spot interest rate on the 1-year bond is 2%. What spot interest rate do you expect to earn on a 2-year bond in one year from now?
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Text book image
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:9781260013962
Author:BREALEY
Publisher:RENT MCG
Text book image
Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage
Text book image
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Text book image
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Text book image
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education