Suppose you have an obligation to pay € 56 000 in 8 years time. To avoid interest risk you intend to hedge with two bonds. You can use one zero coupon bond that matures 10 years from now and one bond that pays coupons once a year at the rate of 5% and matures in 3 value of 100. Assume a flat yield curve. years with face a (a) What amount do you have to invest in each of the two bonds during the first year to hedge your obligation if the yield is 5%? What is the payoff at maturity (face value) of your investment in the zero coupon bond? How many units of the coupon bond do you have to buy? (Assume that you can buy any fractional amount of the bonds.) (b) What is the value of your portfolio today if immediately after the investment the market rate falls to 4%? What will be the value in 8 years if interest rates will not change again?

Suppose you have an obligation to pay € 56 000 in 8 years time. To avoid interest risk you intend to hedge with two bonds. You can use one zero coupon bond that matures 10 years from now and one bond that pays coupons once a year at the rate of 5% and matures in 3 value of 100. Assume a flat yield curve. years with face a (a) What amount do you have to invest in each of the two bonds during the first year to hedge your obligation if the yield is 5%? What is the payoff at maturity (face value) of your investment in the zero coupon bond? How many units of the coupon bond do you have to buy? (Assume that you can buy any fractional amount of the bonds.) (b) What is the value of your portfolio today if immediately after the investment the market rate falls to 4%? What will be the value in 8 years if interest rates will not change again?

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

See similar textbooks

Similar questions

Solve it correctly please. I will rate accordingly.
You have two bonds in your portfolio, Bond Y and Bond Z. Bond Y matures in 10 years and Bond Z matures in 5 years. They both have the same coupon rates. If interest rates increase or decrease which bond would you expect to have the largest change in their market price?
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 of 11 percent for $1,130. The bond has 18 years to maturity. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-1. Two years from now, the YTM on your bond has declined by 1 percent and you decide to sell. What
Jeff is trying to forecast what the annual interest rate on a three-year bond will be two years from now, and he believes that the expectations hypothesis is the basis upon which he should build his forecast. Currently the rates of return on bonds of different maturities look like this: Maturity Rate 1-year 3.00% 2-year 3.50% 3-year 3.75% 4-year 4.00% 5-year 4.00% Based on the expectations hypothesis, what forecast should Jeff make for the return on a three-year bond, two years in the future?
Consider a zero coupon bond that promises to pay $100 each year for the next three years. Suppose we observe the set of zero coupon bond prices and its yields as below a) What is the price of this zero coupon bond? What is its yield to maturity? b) If the observe yield on two-year zero coupon bonds falls to 6% per year, but the other rates remain unchanged. What is your estimation of the value of the three-year annuity paying $100 per year? What is its yield to maturity?
You are a fixed income analyst with an active investment in two bonds. X and Y. Bond X has a coupon rate of 9% and Bond Y has a 10% annual coupon. Both bonds have 5 years to maturity. The yield to maturity for both bonds is now 10%. If the required return rises by 14%, by what percentage will the price of the bond X change? Please provide complete details of the calculations (formula/steps) of the above question
I need assistance with the following: Suppose you have bough the above zero-coupon bond, with value and duration equal to your obligation. Now suppose the rates immediately increase to 9%. What happens to your net position? How much is the tuition obligation? How much is the zero-coupon bond? How much is the net position?
The following income statement and balance sheets for Laser World are provided: LASER WORLD Income Statement For the year-ended December 31, 2021 Sales revenue $ 2,260,000 Cost of goods sold 1,500,000 Gross profit 760,000 Expenses: Operating expenses 345,000 Depreciation expense 66,000 Loss on sale of land 4,600 Interest expense 24,000 Income tax expense 58,000 Total expenses 497,600 Net income $ 262,400 LASER WORLD Balance Sheet December 31 2021 2020 Assets Current assets: Cash $127,000 $104,000 Accounts receivable 91,000 72,000 Inventory 200,000 180,000 Prepaid rent 12,000 12,000 Long-term assets: Land 270,000 210,000 Equipment 270,000 220,000 Accumulated depreciation (74,000) (46,000) Total assets $896,000 $752,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $57,000 $56,000 Interest payable 8,900…
Assume you can buy a bond that has a par value of $1000, matures in 10 years, yielding 6% and has a duration of 5. If you would like to use this bond to form a guaranteed investment contract “GIC” and offer a guaranteed rate of return to investors for certain years. a. what is the maximum yield you can offer? Why? Explain. b. For how many years would you make the guarantee? Explain.
Bond X has 20 years to maturity, a 8% annual coupon, and a R 1,000 face value. The required rate of return is 12%. Suppose you want to buy the bond and you plan to hold the bond for 6 years. You expect that in 6 years, the yield to maturity on a 15-year bond with similar risk will be priced to yield 8.5%. How much would you like to pay for the bond today?
Consider a bond that promises the following cash ows. The required discount rate is 12%. Year 0 1 2 3 4 Promised Payments 160 170 180 230 You plan to buy this bond, hold it for 2.5 years, and then sell the bond. a.What total cash will you receive from the bond after the 2.5 years? Assume that periodic cash ows are reinvested at 12%. b.Assuming all market interest rates are 12%, what is the duration of this bond?
Bond X has 20 years to maturity, a 8% annual coupon, and a R 1,000 face value. The required rate of return is 12%. Suppose you want to buy the bond and you plan to hold the bond for 6 years. You expect that in 6 years, the yield to maturity on a 15-year bond with similar risk will be pricedto yield 8.5%. How much would you like to pay for the bond today?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS