UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 25, Problem 15QP
Forward Pricing This morning you agreed to buy a one-year Treasury bond in six months. The bond has a face value of $1,000. Use the spot interest rates listed here to answer the following questions:
| Time | EAR |
| 6 months | 3.61% |
| 12 months | 4.05 |
| 18 months | 4.73 |
| 24 months | 5.42 |
a. What is the forward price of this contract?
b. Suppose shortly after you purchased the forward contract all rates increased by 30 basis points. For example, the six-month rate increased from 3.61 percent to 3.91 percent. What is the price of a forward contract otherwise identical to yours given these changes?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Consider a bond (with par value = $1,000) paying a coupon rate of 10% per year semiannually when the market interest
rate is only 4% per half-year. The bond has three years until maturity.
Required:
a. Find the bond's price today and six months from now after the next coupon is paid.
b. What is the total (6-month) rate of return on the bond?
Complete this question by entering your answers in the tabs below.
Required A Required B
Find the bond's price today and six months from now after the next coupon is paid.
Note: Round your answers to 2 decimal places.
Current price
Price after six months
$
$
1,052.42
1,044.52
Suppose you purchase a 10-year bond with 5% annual coupons. You hold the bond for four years and sell it immediately after receiving the fourth coupon. If the bond's yield to
maturity was 3.49% when you purchased and sold the bond,
a. What cash flows will you pay and receive from your investment in the bond per $100 face value?
b. What is the internal rate of return of your investment?
Note: Assume annual compounding.
a. What cash flows will you pay and receive from your investment in the bond per $100 face value?
The cash flow at time 1-3 is $ (Round to the nearest cent. Enter a cash outflow as a negative number.)
Suppose that for a price of $960 you purchase a 7-year Treasury bond that has a face value of
$1,000 and a coupon rate of 4%. If you sell the bond one year later for $1,120, what was your rate of
return for that one-year holding period?
The rate of return for the one-year holding period was %. (Round your response to one decimal
place.)
Chapter 25 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 25 - Prob. 1CQCh. 25 - Prob. 2CQCh. 25 - Prob. 3CQCh. 25 - Prob. 4CQCh. 25 - Prob. 5CQCh. 25 - Prob. 6CQCh. 25 - Option Explain why a put option on a bond is...Ch. 25 - Hedging Interest Rates A company has a large bond...Ch. 25 - Prob. 9CQCh. 25 - Prob. 10CQ
Ch. 25 - Prob. 11CQCh. 25 - Prob. 12CQCh. 25 - Prob. 13CQCh. 25 - Prob. 14CQCh. 25 - Hedging Strategies William Santiago is interested...Ch. 25 - Prob. 16CQCh. 25 - Prob. 1QPCh. 25 - Prob. 2QPCh. 25 - Prob. 3QPCh. 25 - Prob. 4QPCh. 25 - Prob. 5QPCh. 25 - Duration What is the duration of a bond with three...Ch. 25 - Duration What is the duration of a bond with four...Ch. 25 - Duration Blue Stool Community Bank has the...Ch. 25 - Prob. 9QPCh. 25 - Prob. 10QPCh. 25 - Prob. 11QPCh. 25 - Prob. 12QPCh. 25 - Prob. 13QPCh. 25 - Forward Pricing You enter into a forward contract...Ch. 25 - Forward Pricing This morning you agreed to buy a...Ch. 25 - Prob. 16QPCh. 25 - What is the monthly mortgage payment on Jerrys...Ch. 25 - Prob. 2MCCh. 25 - Prob. 3MCCh. 25 - Prob. 4MCCh. 25 - Suppose that in the next three months the market...Ch. 25 - Are there any possible risks Jennifer faces in...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Consider a bond that promises the following cash ows. The required discount rate is 12%. Year 0 1 2 3 4 Promised Payments 160 170 180 230 You plan to buy this bond, hold it for 2.5 years, and then sell the bond. a.What total cash will you receive from the bond after the 2.5 years? Assume that periodic cash ows are reinvested at 12%. b.Assuming all market interest rates are 12%, what is the duration of this bond?arrow_forwardConsider a bond paying a coupon rate of 11.00% per year semiannually when the market interest rate is only 4.4% per half-year. The bond has six years until maturity. Required: a. Find the bond's price today and six months from now after the next coupon is paid. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Current price Price after six months b. What is the total rate of return on the bond? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Total rate of return % per six monthsarrow_forwardSuppose you purchase a ten-year bond with 12% annual coupons. You hold the bond for four years and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 10.64% when you purchased and sold the bond, a. What cash flows will you pay and receive from your investment in the bond per $100 face value? b. What is the internal rate of return of your investment? Note: Assume annual compounding. a. What cash flows will you pay and receive from your investment in the bond per $100 face value? The cash flow at time 1-3 is $ (Round to the nearest cent. Enter a cash outflow as a negative number.) The cash outflow at time 0 is $ number.) (Round to the nearest cent. Enter a cash outflow as a negative The total cash flow at time 4 (after the fourth coupon) is $. (Round to the nearest cent. Enter a cash outflow as a negative number.) b. What is the internal rate of return of your investment? The internal rate of return of your investment is %. (Round to two decimal…arrow_forward
- Hello Can you show how the computation was made from the solutions guidearrow_forwardConsider a bond paying a coupon rate of 10% per year semi-annually when the market interest rate is only 4% per half-year. The bond has three years until maturity. This initial payment is $1000. A: What is find the bond’s price today and 6 months time after the next coupon is paid? B: What is the total rate of return on the bond?arrow_forwardYou can enter into a forward contract for a bond with a maturity in one year months that pays a coupon payment of $25 every six months. The bond has a forward price of $930. The current zero coupon rate for 6 months is 4% annually and the zero coupon risk free rate for one year is 5% annually (assume continuous compounding). The current price of the bond is $943. Use the equilibrium forward price equation (F=Sert) adjusted for both coupon payments to see if an arbitrage opportunity exists. If arbitrage is possible, explain the arbitrage opportunity that exists and show how the profit can be earned – make sure to explain every step in detail in realizing the profit and establishing the arbitrage. If arbitrage is not possible, show how you know it is not possible. ANSWER IN TYPING OTHER WISE DOWNVOTE YOUarrow_forward
- Suppose you purchase a 10-year bond with 6% annual coupons. You hold the bond for four years and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 4.01% when you purchased and sold the bond, a. What cash flows will you pay and receive from your investment in the bond per $100 face value? b. What is the internal rate of return of your investment? Note: Assume annual compounding. The cash flow at time 1-3 is $ (Round to the nearest cent. Enter a cash outflow as a negative number.) (Round to the nearest cent. Enter a cash outflow as a negative number.) The cash outflow at time 0 is $ The total cash flow at time 4 (after the fourth coupon) is $ negative number.) b. What is the internal rate of return of your investment? (Round to the nearest cent. Enter a cash outflow as aarrow_forwardPlease show full steps and correctly thanksarrow_forwardI need assistance with the following: Suppose you have bough the above zero-coupon bond, with value and duration equal to your obligation. Now suppose the rates immediately increase to 9%. What happens to your net position? How much is the tuition obligation? How much is the zero-coupon bond? How much is the net position?arrow_forward
- Suppose that you buy a two-year 7.3% bond at its face value. a-1. What will be your total nominal return over the two years if inflation is 2.3% in the first year and 4.3% in the second? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Nominal return a-2. What will be your real return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Real return % % Real return Nominal return b. Now suppose that the bond is a TIPS. What will be your total 2-year real and nominal returns? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) 1%arrow_forwardA 10-year government bond has face value of OR 200 and a coupon rate of 6% paid semiannually. Assume that the interest rate is equal to 8% per year. What is the bond’s price? What is the reason for the difference in price on an annual and semiannually basis? Discuss the role of financial managers.arrow_forwardSuppose that you trade a forward contract today that matures after one year. The forward price is $105 and the simple interest rate is 7 percent per year. If after six months from today, the spot price is going to be $125 and the value of the forward contract is $20, the arbitrage profit that you can make today by trading one forward contract and other securities is?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
What happens to my bond when interest rates rise?; Author: The Financial Pipeline;https://www.youtube.com/watch?v=6uaXlI4CLOs;License: Standard Youtube License