KroBank issues a zero coupon bond and it has to pay the face value of the bond of $100 M due in exactly five years. Assuming interest rates are currently at 8% p.a., which of the following is the best investment option for the bank to ensure it has enough funds to meet the liability in five years:

KroBank issues a zero coupon bond and it has to pay the face value of the bond of $100 M due in exactly five years. Assuming interest rates are currently at 8% p.a., which of the following is the best investment option for the bank to ensure it has enough funds to meet the liability in five years:

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 9P

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Question

Invest $100M today in coupon-paying bonds paying 8% p.a. annual coupons with maturity of 7 years (duration is 5.62 years), sell the bonds in year 5.

Invest $100M today in coupon-paying bonds paying 8% p.a. annual coupons with maturity of 6 years (duration is 4.99 years), sell the bonds in year 5.

Invest $100 M today in coupon-paying bonds paying 8% p.a. annual coupons with maturity of 5 years (duration is 4.31 years).

Invest $100 M today in coupon-paying bonds paying 8% p.a. annual coupons with maturity of 8 years (duration is 6.21 years), sell the bonds in year 5.

Definition Definition Calculates the present value of a bond's expected future periodic coupon payments. Bond valuation determines the theoretical fair value of a particular bond and helps investors estimate what rate of return they could expect. The bond's theoretical fair value is computed by discounting the future cash flows or coupon payments by an applicable discount rate.

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