1. Suppose a commercial bank wants to buy Treasury bills. If you know that these instruments pay €5.000 in a year and currently sell for €5,012. Which is the yield to maturity of these bonds? Is this a typical situation? Because? 2. A government bond of face value £1,000 has a coupon rate 2%, its current price is £1. 100 and its price is expected to increase

1. Suppose a commercial bank wants to buy Treasury bills. If you know that these instruments pay €5.000 in a year and currently sell for €5,012. Which is the yield to maturity of these bonds? Is this a typical situation? Because? 2. A government bond of face value £1,000 has a coupon rate 2%, its current price is £1. 100 and its price is expected to increase

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

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Suppose that a commercial bank wants to buy Treasury bills. These instruments pay $6,000 in one year and are currently selling for $6,100. The yield to maturity of these bonds is%. (Round your response to two decimal places.) Is this a typical situation? OA. No. In normal times banks will not choose to pay more than the face value of a discount bond, since that implies negative yields to maturity. B. Yes. Often times, investors and banks will choose to pay more than the face value of a discount bond. It is more convenient to hold Treasury bills or keep their funds as deposits at the central bank because they are stored electronically.
a. The spot price of the British pound is currently $1.50. If the risk-free interest rate on 1-year government bonds is 1% in the United States and 2% in the United Kingdom, what must be the forward price of the pound for delivery one year from now?b. How could an investor make risk-free arbitrage profits if the forward price were higher than the price you gave in answer to part (a)? Give a numerical example.
Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 6 years to maturity, and a coupon rate of 8.9 percent paid annually. If the YTM is 10.9 percent, what is the current bond price in euros? Can this be solved only with excel or I can use a financial calculator?
Hi, I'm working on this corporate finance question from my textbook. How do I solve it using formulas or the financial calculator? A bond promises a risk-free payment of $1000 in one year. The risk-free rate of interest is2.64%. a) What is the price of the bond? b) If the price of the bond is actually $960, what is the arbitrage strategy? Illustrate all cash flowstoday and one year from today.
Suppose the central bank wishes to increase the money supply by $500 million and does so by purchasing one-year zero coupon bonds from an economic agent to increase bank reserves. If the central bank buys bonds with an interest rate of 2.5%, how many bonds must they buy to reach their targeted increase in the money supply? Assume the required reserve ratio is 10% and commercial banks fully loan out. Hint: you will need to use the money multiplier in this answer as well as bond pricing - a zero coupon bond is a promise to pay $1000 in one year. Assume there is no currency in the
Now suppose a financial institution has a duration gap of -4 years and $5 million in assets. The cheapest to deliver bond for Treasury futures contracts has a duration of 3 years. How will the manager hedge this interest rate risk? Assume the cheapest to deliver bond is trading at par.
After setting aside the required reserves, the bank decides to invest the remaining amount of cash. The bank invests £15 million in a coupon bond issues by UK Treasury. What remains is loaned out. The coupon bond of point (e) pays a coupon of 4% per year, paid semi-annually. It has 2 years to maturity. If the current Yield-to-Maturity is 3.5% semi-annually, what is the price of the bond?
I (Interest rates) 1. Consider a bank account paying interest rate R2 = 4% with semi-annual compounding frequency. What is the equivalent rate R1 with yearly compounding frequency? What is the equivalent rate Rc with continuous compounding? 2. Explain briefly (in words) what are the potential pitfalls of using the Internal Rate of Return (IRR) for the evaluation of investment projects. 3. Consider the following two bonds: bond (A) is a zero-coupon bond with maturity TA and duration DA = TA; bond (B) is a coupon bond with maturity TB > TA and duration DB = TA. Which of the two bonds has a greater convexity? (Justify your answer.)
D6) Since funds must keep flowing for a country to remain economically viable, briefly explain the role of financial institutions and financial markets in ensuring a regular funds flow between demanders and suppliers of funds. (80-100 words) A 15-year annual coupon bond trades for $1,200 in the market. If the market interest rate is 4%, what is the bond’s coupon rate?
1. Present value is the value today of a future cash flow or series of cash flows. Discounting is the process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding. Suppose a U.S. government bond promises to pay $2,249.73 three years from now. If the going interest rate on three-year government bonds is 4%, how much is the bond worth today? How would your answer change if the bond matured in 5 years rather than 3? What if the interest rate on the 5-year bond was 6% rather than 4%? How much would $1,000,000 due in 100 years be worth today if the discount rate was 5%? if the discount rate was 20%? 2. A dollar in hand today is worth more than a dollar to be received next year. Suppose you currently have $2,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 4% interest compounded annually. How much will you have when the CD matures? How would your answer change if the interest rate were 5% or 6% or 20%?
In this problem we are going to calculate bond prices and returns Suppose that the yield on a 3 year note is 2.5%. a) Calculate the price of the 3 year note (face value = $1000) with three annual coupon payments (after year 1, after year 2, after year 3) of $30, i.e., the coupon rate is 3.0%. b) Is this note selling at a discount or premium? Explain. Suppose that after one year and after you receive one coupon payment, you decide to sell your note. Your note is now a two year note with one coupon payment after 1 year and another after year 2. Consider the following two scenarios: Scenario #1 - interest rates on what is now a two year note (i.e., your note) have fallen to 1.00% Scenario #2 - interest rates on what is now a two year note (i.e., your note) have risen to 4% c) given scenan d) Calculate the price that you can sell your note for under scenario #1 and the associated rate of return when you sell your note Calculate the price that you can sell your note for under scenario #2…
Suppose that the price of a Treasury bill with90 days to maturity and a $1 million face valueis $980,000. What is the yield on a bankdiscount basis? *Please include work*

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