Suppose the current yield on a one-year zero-coupon bond is 4%, while the yield on a five-year zero-coupon bond is 6%. Neither bond has any risk of default. Suppose you plan to invest for one year. You will earn more over the year by investing in the five-year bond as long as its yield does not rise above what level? (Assume $1 face value bond.) Hint: It is best not to round intermediate calculations-make sure to carry at least four decimal places in intermediate calculations. Note: Assume annual compounding. The yield should not rise above %. (Round to two decimal places.) C

Suppose the current yield on a one-year zero-coupon bond is 4%, while the yield on a five-year zero-coupon bond is 6%. Neither bond has any risk of default. Suppose you plan to invest for one year. You will earn more over the year by investing in the five-year bond as long as its yield does not rise above what level? (Assume $1 face value bond.) Hint: It is best not to round intermediate calculations-make sure to carry at least four decimal places in intermediate calculations. Note: Assume annual compounding. The yield should not rise above %. (Round to two decimal places.) C

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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One of the above is the most accurate statement?a. A bond is trading at a premium if its yield to maturity approaches its annual coupon.b. As interest rates rise, a 10-year coupon bond's relative price adjustment would be higher than that of a 10-year nil coupon bond.c. A coupon bond's present yield matches the yield to maturity whether it sells at par.d. Both a and c are true.e. None of the above claims are true.
Suppose you are buying shares of a discount bond that currently cost $10 each. You have $100 of equity and can borrow at 0% interest. Assume the leverage ratio is defined as debt/equity. If your leverage ratio is 4, what is the lowest price the bond can fall to before you become insolvent? Enter your answer as numbers, not words. Round to the nearest cent if needed and do not put a dollar sign in your answer. Lowest price at leverage ratio of 4 =$ Suppose that your leverage ratio is 9 instead of 4. Given this, what is the lowest price the bond can fall to before you become insolvent? Enter your answer as numbers, not words. Round to the nearest cent if needed and do not put a dollar sign in your answer. Lowest price at leverage ratio of 9 = $ Which leverage ratio is associated with a higher risk of insolvency? Enter the number 4 if you think insolvency risk is higher when leverage is 4; enter the number 9 if you think insolvency risk is higher when leverage is 9. Higher insolvency risk…
Which are TRUE about the inverse relationship between price and yield: a. when interest rates rise; bond prices fall b. interest rates have no effect on the price of a zero-coupon bond c. when yields go up; prices go down d. the yield on a 30-year bond goes up when interest rates go up
A zero-coupon bond with a market-beta of 0.2 promises to pay $1,000 in the first year. However, it may default and pay nothing with probability 0.09. If the risk-free rate is 4%, the equity premium is 6.1%, and the CAPM is correct, what would be the bond price today?
For the yield-to-maturity (YTM) to qual the actual compound return an investor realizes on an investment in a coupon bond, we must assume: O A. cash flows will be paid as promised. B. The bond will be held until maturity. C. cash flows will be reinvested at the YTM rate. D. All of the above.
Consider a coupon bond, period t = 0 price $900, with payments: t=0 1 2 3 50 50 1050 Discount (zero coupon) bonds of 1, 2 and 3 years maturity (all with maturity value of $1000) sell for respectively, 960, 900, 820 dollars. Is this coupon bond properly priced? If not, design an arbitrage argument to profit by the mispricing.
There are four similar coupon bonds.If the only differences are their maturities and YTMs.which one would have the most volatile market price when there is a fluctuation in the market interest rate?Please carefully explain. 7-year maturity with a 8% YTM 15-year maturity with a 4% YTM 7-year maturity with a 6% YTM 15-year maturity witth a 2% YTM
Which of the following statements is the most accurate? 43. a. Long-term cash flows are riskier than short-term cash flows.Furthermore, a 20-year bond that is callable after 5 years would have a shorter projected duration, if not none at all, than a noncallable 20-year bond with equal maturity. As a result, if all other features are equal, investors can demand a lower rate of return on the callable bond than on the noncallable bond. b. A noncallable 20-year bond would have an average life that is equivalent to or better than a callable 20-year bond with otherwise similar characteristics. Furthermore, the longer a bond's lifespan, the higher the interest rate danger it poses to buyers. As a result, while all other factors remain stable, callable bonds subject borrowers to fewer interest rate risk than noncallable bonds. c. Both a and b are right statements. d. None of the above claims are true.
Bond A and Bond B are zero coupon bonds. Bond A has a maturity of 10 years and Bond B has a maturity of 15 years. This would mean that Bond B has more interest rate risk as compared to Bond A. Group of answer choices True False
The market wide discount rates are known to be 0.96 for 1-year and 0.90 for 2- years. You observe that a two-year zero-coupon bond with a face value of £250 trades at £230 and a 1-year zero coupon bond with a face value of £150 trades at £142. What trading strategy do you implement (there is no need to calculate the number or values of the bonds traded) and what do you expect the outcome of this strategy to be if it is mimicked by other institutions in the bond market?
Which one of the following will decrease the current yield of a bond? changing the frequency of coupon payment from semi-annual to annual. increasing the face value. increasing the coupon rate. decreasing the yield to maturity. decreasing the bond price.
Please solve this practice problem

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