QUESTION 2 A 4.5 percent coupon bond with 12 years left to maturity is priced to offer a 6 percent yield to maturity. What is the price of the bond? Assume interest payments are paid semi-annually.
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- Yield to Maturity and Yield to Call Arnot International’s bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = $1,090). What is the yield to maturity? What is the yield to call if they are called in 5 years? Which yield might investors expect to earn on these bonds, and why? The bond’s indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5. In Year 5, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. Thus, in Year 6 they may be called at 108% of face value, in Year 7 they may be called at 107% of face value, and so on. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?Question 2 Assume the yield curve is flat shown as following table. A cash and $duration-neutral butterfly is to be constructed by selling one thousand 7-year coupon paying bonds and purchasing qs and ql coupon paying bonds with maturities 3 and 15 years respectively. More information on the bonds to be used in the strategy is given Note that we are assuming all bonds pay interest semi-annually. (a) Explain how to interpret the modified duration of -8.86 corresponding to the 15-year maturity bond. (b) Write down the system of equations that needs to be solved in order to find qs and ql and verify that the solution to this system is qs = 679.32 and ql =366.23. (c) Find the profit from this strategy if yield curve moves: (i) up to 8% pa and (ii) down to 5% pa. (d) Explain why in practice it may be difficult to profit from the cash and $duration neutral butterfly. (e) Explain the major differences between the 50-50 butterfly strategy and the cash and $duration neutral butterfly.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.
- Q.A $35,000, 5% bond that matures in 10 years has interest payable semiannually. If the quoted price is $36,500, what is the yield rate? Cannot use Excel or a financial calculator. Please show step by step work.QUESTION 2. Compute the intrinsic value of a 15% coupon, 4-year maturity bond whoseprincipal will be repaid in equal installments after the first 2 years in which there will be no principal payment.The face value is 1000₺ and the market interest rate is forecast as 16% for the first year and 17% for the secondyear and 18% for the third year.Question 7 Olaf Limited is considering alternative sources of funds to finance its production of the non-alcohol-based hand sanitization gel. Recently, it offered a coupon bonds with maturity period of 20 years. The annual coupon rate of the bonds is 5.75% and the yield on the bonds is estimated as 7% per annum. Par value of coupon bond is $1,000 and coupon is payable annually. Required: Estimate the maximum price that an investor should pay for these corporate bonds today. Estimate the price of the bond after one year if the annual yield to maturity falls to 6%. Identify the relationship of the bond price with interest rate based on results on part a and b.
- Question 4 (a) Consider a 3-year forward contract to buy a coupon-bearing bond thatwill mature 3-years from today. The current price of the bond is $120. Suppose that on that bond 3 coupon payments of $10 are expected after 12, 24, and 36 months. We assume that the 12M, 24M, and 36M risk-free interest rates (continuously compounded) are 1.75%, $2.1, and 2.5% per annum, respectively. Determine the strike price, the forward price and the value of the forward contract.(b) 18 months later, the price of the bond is $105 and the risk-free interest rates for maturity 6M and 18M (continuously compounded) are 1.1% and 1.9% per annum, respectively. What are the strike price, the forward price and the value of the forward contract?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%).12. The schedule of 1-year forward rate across next 5 years is as follows. Year 1-year Forward Rate 1 4.6% 2 4.9% 3 5.2% 4 5.5% 5 5.8% What should the purchase price of a 4-year zero-coupon bond be if it is purchased today and has face value of $1,000?
- QUESTION 2. Compute the intrinsic value of an 18% coupon, a 4-year maturity bond whose principal will be repaid in equal installments after a non-payment period of 2 years. The face value is 16. The market interest rate is forecast as 19% for the 1st year, 18% for the 2nd year, and 17% for the 3rd and 4th years.How much should you pay for a 10 % annual coupon bond, with a $1,000 face value, which matures in 3 years? Assume a required return of 5%. A. $1136.16 B. $136.16 C. $863.84 D. $1000D3) Finance Suppose that there is 30-year coupon bond with par value of $100 and Macaulay duration of 20.56. The coupon rate is unknown. Currently, the bond is traded at $90 and the yield is flat at 20% pa. Yield to maturity is an annualized simple interest rate compounded annually. If the bond yield increases by 50 basis points, what is the approximation of the percentage capital gain or loss? Please choose the correct range for the percentage capital gain/loss, i.e., if it is -3.5%, please select “A value between -3% and -4%” A value between -9% and -10% A value between -8% and -9% None of the other answers are correct. A value between -7% and -8% A value between -10% and -11%