= = Problem 2 Currently the yield curve observed in the market is as follows: yı 6%, Y2 = 7%, and yз 9%. You are choosing between a two-year and three-year maturity bonds all paying annual coupons of 8%, once a year. You strongly believe that at the end of year 1 the yield curve will become flat at 9%. (1) Which bond (and why) should you buy if you plan to close out your position in one year right after receiving the coupon payment? (2) Suppose that you can either invest in a two-year bond described above, or invest in a 1-year bank deposit with an annual interest rate of 6%. As in (a), your investment horizon is 1 year. Which option would you choose and why?

= = Problem 2 Currently the yield curve observed in the market is as follows: yı 6%, Y2 = 7%, and yз 9%. You are choosing between a two-year and three-year maturity bonds all paying annual coupons of 8%, once a year. You strongly believe that at the end of year 1 the yield curve will become flat at 9%. (1) Which bond (and why) should you buy if you plan to close out your position in one year right after receiving the coupon payment? (2) Suppose that you can either invest in a two-year bond described above, or invest in a 1-year bank deposit with an annual interest rate of 6%. As in (a), your investment horizon is 1 year. Which option would you choose and why?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 8MC: Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for...

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Assume that the yield curve is YT = 0.04 + 0.001 T. (a) What is the price of a par - $1,000 zero - coupon bond with a maturity of 10 years? (b) Suppose you buy this bond. If 1 year later the yield curve is YT = 0.042 + 0.001 T, then what will be the net return on the bond?
Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.7%, interest rates on 2-year T-bonds yield 2.3%, and interest rates on 3-year T-bonds yield 3.3%. a. If the pure expectations theory is correct, what is the yield ofb 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places.
A short question 4) You are managing a portfolio of $1 million. Your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with maturity of 5 years, and a perpetuity*, each currently yielding 5%. a. How much of each bond will you hold in your portfolio? b. How will these ratios change next year if target duration is now 9 years? *: Perpetuity: a specal case of annuity, where n-> Inf, thus the maturity of the instrument is perpetual.
Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.7%, interest rates on 2-year T-bonds yield 2.5%, and interest rates on 3-year T-bonds yield 3.4%. a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places.
Q1. Consider the following par bond (ie coupon rate=yield):Year: 10 and 20 years . Yld 1.50% and 2.0% Q1c. if you hold the 20Y for 1 year, what is your total return from the investment assuming yldcurve does not change ? Hint: your total return comes from coupon collection as well as price appreciation ordepreciation
step by step solution 1) Consider the following zero-coupon yields on default-free securities: Maturity (years) 1 2 3 4 5 Zero-Coupon YTM 4.80% 4.50% 4.20% 4.00% 3.80% What is the price today of a 4-year default-free security with a face value of $1,000 and an annual coupon rate of 6%? Show all your work. 2) The ABC company has a bond outstanding with a face value of $2,000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 5% and that the coupon payments are to be made semi-annually. How much are each of the semi-annual coupon payments? Assuming the appropriate YTM on the ABC company bond is 8.8%, then at what price should this bond trade?
Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.3%, interest rates on 2-year T-bonds yield 2.3%, and interest rates on 3-year T-bonds yield 3.7%. a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. % 1.3 Show All Feedback b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. 2.4 % Show All Feedback c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. 3.8 Show All Feedback
Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
Suppose there is a large probability that L will default on its debt. For the purpose of this example, assume that the value of Ls operations is 4 million (the value of its debt plus equity). Assume also that its debt consists of 1-year, zero coupon bonds with a face value of 2 million. Finally, assume that Ls volatility, , is 0.60 and that the risk-free rate rRF is 6%.
The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy a bond with an annual coupon rate of 7 percent for $1,160. The bond has 15 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1,000. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b- Two years from now, the YTM on your bond has declined by 1 percent, and you 1. decide to sell. What price will your bond sell for? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b- What is the HPY on your investment? (Do not round intermediate calculations and 2. enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Expected rate of return b-1. Bond price b-2. HPY % I %
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Please do not give solution in image formate thanku. A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $96 and is selling at face value. What will be the annual rate of return on the bond if its yield to maturity at the end of the year is a. 6%? Rate of return in % = ? b. 9.6%? Rate of return in % = ? c. 11.6%? Rate of return in % = ?