a.
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.
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
The
Holding period return is the total value yield on an investment during the time it is held.
r= rate of return
T= the maturity period
(i)At zero coupon bond, the price is,
So, the price of zero coupon bond is $463.19
(ii)Calculate the price of coupon bond (8%),
So, the coupon bond price (8%) is $1,000
(iii)Calculate the price of coupon bond (10%),
So, the coupon bond price (10%) is $1,134.20
b.
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.
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.
r= rate of return
T= the maturity period
(i)At zero coupon bond, the price is,
So, the price of zero coupon bonds is $500.25
(ii) Calculate the price of coupon bond (8%)
So, the coupon bond price (8%) is $1,000
(iii) Calculate the price of coupon bond (10%),
So, the coupon bond price (10%) is $1,124.94
c.
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.
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 BOND | 8% COUPON BOND | 10% COUPON BONDS | |
PRICE AFTER 1 YEAR | 500.25 | 1000 | 1124.94 |
PRICE AT 10 YEARS | 463.19 | 1000 | 1134.2 |
CHANGE IN PRICE | 37.06 | 0 | -9.26 |
COUPON INCOME | 0 | 80 | 100 |
PRE-TAX INCOME(PRICE+COUPON) | 37.06 | 80 | 90.74 |
PRE-TAX RATE OF RETURN | 8.00% | 8.00% | 8.00% |
d.
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.
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 BOND | 8% COUPON BOND | 10% COUPON BONDS | |
TAXES | 7.412 | 24 | 28.148 |
AFTER TAX INCOME | 29.92 | 56 | 62.59 |
AFTER TAX RATE OF INTEREST | 6.46% | 5.60% | 5.52% |
e.
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.
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.
r= rate of return
T= the maturity period
(i)At zero coupon bond, the price is,
So, the price of zero coupon bonds is $500.25
(ii)Calculate the price of coupon bond (8%)
So, the coupon bond price (8%) is $1,000
(iii)Calculate the price of coupon bond (10%),
So, the coupon bond price (10%) is $1,124.94
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Chapter 14 Solutions
EBK INVESTMENTS
- Assume you have a 1-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rate and pays the $80 coupon once per year. The third has a 10% coupon rate and pays the $100 coupon once per year.a. If all three bonds are now priced to yield 8% to maturity, what are the prices of: (i) the zero-coupon bond; (ii) the 8% coupon bond; (iii) the 10% coupon bond?b. If you expect their yields to maturity to be 8% at the beginning of next year, what will be the price of each bond?c. What is your before-tax holding-period return on each bond? d. If your tax bracket is 30% on ordinary income and 20% on capital gains income, what will be the after-tax rate of return on each bond?e. Recalculate your answers to parts (b)–(d) under the assumption that you expect the yields to maturity on each bond to be 7% at the…arrow_forwardYou 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 questionarrow_forwardYou 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?arrow_forward
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