(a) Paris Corporation issue Bond Mars which pays a coupon rate of 8% compounded semi- annually, with a maturity period of 10 years. The face value of the bond is $1,000 with an 10% yield to maturity. 2 years later, the bond's yield dropped to 7% due to a recession in the economy. You are required to calculate the value of Bond Mars before the recession and during recession. Furthermore, briefly describe the changes to the bond's value.
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- Please answer part A-D and give a short explanation of how you arrived at the answer. A) Treasury securities that mature in 10 years currently have an interest rate of 14.7%. Inflation is expected to be 5% each of the next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.2%(t - 1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest? B) Assume that the expectations theory holds, and that liquidity and maturity risk premiums are zero. If the annual rate of interest on a 2-year Treasury bond is 14.8 percent and the rate on a 1-year Treasury bond is 16.3 percent, what rate of interest should you expect on a 1-year Treasury bond one year from now? C) Assume that a 3-year Treasury note has no maturity premium, and that the real, risk-free rate of interest is 3 percent. If the T-note…Problem 07.046 - IRR of a bond purchased at discount rate A mortgage bond issued by Automation Engineering is for sale for $8,700. The bond has a face value of $10,000 with a coupon rate of 7% per year, payable quarterly. What rate of return will be realized if the purchaser holds the bond to maturity 8 years from now? The rate of return will be 11% per year.Problem 2 (Required, 25 marks) We consider a 5-year straight term bond issued today. The bond pays coupon quarterly and the current annual effective yield rate is i = 7.1859%. You are also given that The current bond price is 2167.529. The clean price of the bond at the end of 15th month is 2130.929. Assuming that the yield rate remains unchanged over these 5 years, find the clean price of the bond at the end of 22nd month.
- Task 2 Suppose two zero coupon bonds of $ 10,000 are issued. each: 1) bond A for a period of two years; 2) Bond B for five years. The manager must determine the sensitivity of the bond and the movement of the market rate. The market rate is 8%. Determine bond prices: bond A = Bond B = Here is the new condition: the market rate driven by inflation has risen to 20%, which will affect the price of bonds: bond A = Bond B = Consider the impact of rising market interest rates on bond prices. Change in bond price A = Change in bond price B =Question #3: Bond Pricing and Bond Return (a) A 20 year $1000 face value coupon bond that pays an coupon rate of 12%. The YTM = 15%. Assume that the coupon payment is paid semi-annually. (b) Suppose that next year, the YTM falls to YTM = 13%. Calculate the new price of the bond from Part (a). [Hint: One year has passed since the bond was initially purchased.] (c) Use your answers from Parts (b) and (c) to calculate the one year holding period return of the coupon bond.Problem 2: Complex Systems has an outstanding issue of $1,000-par-value bonds with a 12% coupon interest rate. The issue pays interest annually and has 11years remaining to its maturity date. If bonds of similar risk are currently earning a rate of return of 7%, how much should the Complex Systems bond sell for today? a. b. Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex Systems bond. If the required return were at 12% instead of 7%, what would be the current value of Complex Systems' bond? Contrast this finding with your findings in part a and discuss. C.
- QUESTION 1 A Suppose you deposited the K 1000 in four payments of K250 each on 1st January of 2009, 2010, 2011 and 2012. How much would you have in your account on 1st January 2012 based on 8 percent annual compounding? B A government bond issued 5 years to maturity, a face value of K 1,000 and a coupon rate of 8% paid annually. Similar bonds have a yield of 8 percent. Suppose after one year the yield rises to 9% and interest is paid semi-annually, what would be the value of the bond Assume it is now 1st January 2008. On 1st January 2009, you will deposit K 1000 into a savings account that pays 8 percent If the bank compounds interest annually. How much will you have in your account on 1st January 2012 What would your 1st January 2012 balance be if the bank used quarterly compounding rather than annual compounding?Question 1. Duration and Banking Consider a 5-year bond with annual coupon payments. The bond has a face value (prin- cipal) of $100 and sells for $95. Its coupon rate is 3%. (The coupon rate is the ratio between the coupon value and the face value). The face value is paid at the maturity year in addition to the last coupon payment. 1. Calculate the bond's yield to maturity (YTM) and duration using its YTM. 2. Suppose the bond's YTM changes in the same way as a 5-year T-bill interest rate. Use the bond's modified duration to evaluate the relative change in the 5-year bond's value if the interest rate on 5-year T-bills falls by one basis point, that is, by 0.0001. This part was extracted from the balance sheet of the First Bank of Australia: Assets (Billion AUD) Bond 80 Liabilities (Billion AUD) Fixed-rate liabilities 60 where "Bond" here refers to the bond we specified above and the fixed-rate liabilities (banks future payment obligations) have an average duration of 4 years and YTM of…7. Valuing semiannual coupon bonds Bonds often pay a coupon twice a year. For the valuation of bonds that make semiannual payments, the number of periods doubles, whereas the amount of cash flow decreases by half. Using the values of cash flows and number of periods, the valuation model is adjusted accordingly. Assume that a $1,000,000 par value, semiannual coupon US Treasury note with three years to maturity has a coupon rate of 3%. The yield to maturity (VTM) of the bond is 7.70%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: O $876,205.93 O $1,051,447.12 O $744,775.04 $552,009.74 Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: The T-note described in this problem is selling at a
- Can you please walk me through this? Problem 6-11 DEFAULT RISK PREMIUM A company’s 5-year bonds are yielding 7.75% per year. Treasury bonds with the same maturity are yielding 5 2% per year, and the real risk-free rate (r*) is 2.3%. The average inflation premium is 2 5%; and the maturity risk premium is estimated to be 0.1 x (t 1) %, where t = number of years to maturity. If the liquidity premium is 1%, what is the default risk premium on the corporate bonds?Problem 2: The US government issues a Treasury bond that matures in 5 years, has a face value of $1,000 and a coupon yield of 10 percent, and pays semi-annual coupons. Suppose the Yield To Maturity (YTM) of similar bonds is 8%, What is the price of this Treasury bond? Suppose the YTM was 12% instead. Without making any calculation, state and prove whether the bond price would be higher or lower than the face value. After holding the bond for 6 months, you receive one coupon payment and then you immediately sell the bond for a price of $110 (per $100 of face value). Compute the holding period return (the YTM is 8%).7. Valuing semiannual coupon bonds Bonds often pay a coupon twice a year. For the valuation of bonds that make semiannual payments, the number of periods doubles, whereas the amount of cash flow decreases by half. Using the values of cash flows and number of periods, the valuation model is adjusted accordingly. Assume that a $1,000,000 par value, semiannual coupon US Treasury note with four years to maturity has a coupon rate of 3%. The yield to maturity (YTM) of the bond is 11.00%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: $895,940.83 $746,617.36 $634,624.76 $470,368.94 Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: When valuing a semiannual coupon bond, the time period variable(N) used to calculate the price of a bond reflects the number of periods remaining in the bond's life.