Louis Winthorpe III was evaluating investment opportunities to determine what he should do with his money. One of the investments that he was evaluating was investing $10,000,000 in US corporate securities. Oracle just priced a $7bn in US investment grade securities with differing maturities. They priced the following: Security Issued ORCL 5.80% 11/10/2025 $1,000,000 ORCL 6.15% 11/09/2029 $1,250,000 ORCL 6.25% 11/09/2032 $2,250,000 Price 99.00 101.25 101.00 Louis likes the company and wants to invest his money in one of these securities (all have face value of $1,000 per bond). 1. If he wants to invest his money in the bond that offers the greatest yield to maturity, which bond should he invest in? 2. If the yield to maturity on the ORCL 5.8% '25 was 5.43%, what would the price of the security be? 3. If Louis purchases the bond so it settles on 12/15/22 and the first coupon payment is made on 5/10/2023, how much accrued interest is he paying for each bond as part of his purchase price (recall that US corporates use the 30/360 methodology for calculating accrued interest)? 4. If while determining what he wants to invest in, Louis concludes that US treasury rates will be higher next year, what would that do to the price of the bonds a year from now? a. Please include in your answer the impact that rates have on principal and reinvestment opportunities 5. Louis calculates the below spot and forward rates. 1fo (6-month spot rate) 4.5% 1f₁ 6.4% 8.1% 10.0% 1f2 1f3 If he is correct, what would he estimate the value of the ORCL 5.8 '25 bond will be in two years (assume that there is no credit deterioration, and the market assumption is the face value will be received at maturity)?
Louis Winthorpe III was evaluating investment opportunities to determine what he should do with his money. One of the investments that he was evaluating was investing $10,000,000 in US corporate securities. Oracle just priced a $7bn in US investment grade securities with differing maturities. They priced the following: Security Issued ORCL 5.80% 11/10/2025 $1,000,000 ORCL 6.15% 11/09/2029 $1,250,000 ORCL 6.25% 11/09/2032 $2,250,000 Price 99.00 101.25 101.00 Louis likes the company and wants to invest his money in one of these securities (all have face value of $1,000 per bond). 1. If he wants to invest his money in the bond that offers the greatest yield to maturity, which bond should he invest in? 2. If the yield to maturity on the ORCL 5.8% '25 was 5.43%, what would the price of the security be? 3. If Louis purchases the bond so it settles on 12/15/22 and the first coupon payment is made on 5/10/2023, how much accrued interest is he paying for each bond as part of his purchase price (recall that US corporates use the 30/360 methodology for calculating accrued interest)? 4. If while determining what he wants to invest in, Louis concludes that US treasury rates will be higher next year, what would that do to the price of the bonds a year from now? a. Please include in your answer the impact that rates have on principal and reinvestment opportunities 5. Louis calculates the below spot and forward rates. 1fo (6-month spot rate) 4.5% 1f₁ 6.4% 8.1% 10.0% 1f2 1f3 If he is correct, what would he estimate the value of the ORCL 5.8 '25 bond will be in two years (assume that there is no credit deterioration, and the market assumption is the face value will be received at maturity)?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Concept explainers
Question
Please give me answer very fast I will rate
Transcribed Image Text:QUESTION 1
Louis Winthorpe III was evaluating investment opportunities to determine what he should do
with his money. One of the investments that he was evaluating was investing $10,000,000 in
US corporate securities. Oracle just priced a $7bn in US investment grade securities with
differing maturities. They priced the following:
Issued
Price
$1,000,000
99.00
ORCL 6.15% 11/09/2029
$1,250,000
101.25
ORCL 6.25% 11/09/2032 $2,250,000 101.00
Security
ORCL 5.80% 11/10/2025
Louis likes the company and wants to invest his money in one of these securities (all have face
value of $1,000 per bond).
1. If he wants to invest his money in the bond that offers the greatest yield to maturity,
which bond should he invest in?
2. If the yield to maturity on the ORCL 5.8% '25 was 5.43%, what would the price of the
security be?
3. If Louis purchases the bond so it settles on 12/15/22 and the first coupon payment is
made on 5/10/2023, how much accrued interest is he paying for each bond as part of
his purchase price (recall that US corporates use the 30/360 methodology for calculating
accrued interest)?
4. If while determining what he wants to invest in, Louis concludes that US treasury rates
will be higher next year, what would that do to the price of the bonds a year from now?
a. Please include in your answer the impact that rates have on principal and
reinvestment opportunities
5. Louis calculates the below spot and forward rates.
1fo (6-month spot rate) 4.5%
1f1
6.4%
1f2
8.1%
10.0%
1f3
If he is correct, what would he estimate the value of the ORCL 5.8 '25 bond will be in
two years (assume that there is no credit deterioration, and the market assumption is
the face value will be received at maturity)?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps with 6 images
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.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
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