The implied 1-year forward rate for default free zero coupon bonds. Introduction: Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

Question

The Fortune Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 24 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 28,000 Sales revenue $ 14,500 $ 15,000 $ 15,500 $ 12,500 Operating costs 3,100 3,200 3,300 2,500 Depreciation 7,000 7,000 7,000 7,000 Net working capital spending 340 390 440 340 ?

Answer 1

Question

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

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Answer 2

Question

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

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Answer 3

Question

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

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Answer 4

Question

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

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Answer 5

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

Answer 6

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

Answer 7

Chapter 15, Problem 17PS

a.

Summary Introduction

To calculate: The implied 1-year forward rate for default free zero coupon bonds.

Introduction:

Implied forward rate: Normally we come across a difference of amount between the spot interest rates and the forward interest rate. This difference can be termed as implied forward rate. Implied forward rate helps the investors to compare the returns across investments.

Answer 8

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

Answer 9

b.

Summary Introduction

To calculate: The yield to maturity on 1-year zero-coupon bonds next year, assuming that pure expectations hypothesis of the term structure is correct.

Introduction:

Yield to maturity: Whenever an investment is made by the investor, he/she is entitled to earn return for holding the security or bonds till it matures. When this return is calculated in percentages, it is called yield to maturity.

Answer 10

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

Answer 11

c.

Summary Introduction

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

Answer 12

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Answer 13

d.

Summary Introduction

To calculate: The expected total rate of return over next year if a 2-year zero coupon bond is purchased now.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Answer 14

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Answer 15

e.

Summary Introduction

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Answer 16

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

Answer 17

f.

Summary Introduction

To calculate: The current price of a 3-year maturity bond with 12% coupon rate which is paid annually.

Introduction:

Bond price: It is supposed to be the present value of a bond derived after discounting the future cash flows that are expected to be generated by a bond. It is also referred as selling price of the bond.

Answer 18

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

Answer 19

g.

Summary Introduction

To calculate: The total expected rate of return over the next year.

Introduction:

Expected rate of return: When an investment is made, the investor expects or anticipates some return. The rate at which this anticipated or expected returns are earned is called expected rate of return. It is also called as anticipated rate of return.

Answer 20

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Ch. 15 - Prob. 1PS Ch. 15 - Prob. 2PS Ch. 15 - Prob. 3PS Ch. 15 - Prob. 4PS Ch. 15 - Prob. 5PS Ch. 15 - Prob. 6PS Ch. 15 - Prob. 7PS Ch. 15 - Prob. 8PS Ch. 15 - Prob. 9PS Ch. 15 - Prob. 10PS

Solution Summary: The author calculates the implied 1-year forward rate for default free zero coupon bonds, assuming the expectations hypothesis of the term structure is correct.

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Chapter 15 Solutions

Solution Summary: The author calculates the implied 1-year forward rate for default free zero coupon bonds, assuming the expectations hypothesis of the term structure is correct.

To calculate: The yield on 2-year zeros. Introduction: Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

To calculate: The expected total rate of return over the next 3-year zero coupon bond. Introduction: Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.

Chapter 15 Solutions

To calculate: The yield on 2-year zeros.

Introduction:

Zero-coupon bond: It is a type of bond where the face value of the bond is repaid at the time of maturity. In simple words, since no periodic interest payments or coupon payments are made on bonds, it is termed as zero-coupon bond.

To calculate: The expected total rate of return over the next 3-year zero coupon bond.

Introduction:

Total return: It is supposed to be the rate of return on investment for a given period. It includes capital gains, dividends, interest and distributed realized earnings for a given period.