The US government sells 2 types of savings bonds. One is called a series EE bond and has a fixed rate. The other is called an I bond-the / stands for inflation - and the rate adjusts based on inflation. These are both zero-coupon bonds and are different from other bonds because they do not have a "face value"/"par value". This is because investors can purchase the bonds for any amount between $25 and $10,000 so the redemption value (future value) of the bond depends on the dollar amount invested and the interest rate. Interest on these bonds compounds semi-annually. (More information on US Savings bonds) Suppose that you invest $500 in a Series EE bond with a yield to maturity of 2.44%. What will be the bond's value in 8 years?

The US government sells 2 types of savings bonds. One is called a series EE bond and has a fixed rate. The other is called an I bond-the / stands for inflation - and the rate adjusts based on inflation. These are both zero-coupon bonds and are different from other bonds because they do not have a "face value"/"par value". This is because investors can purchase the bonds for any amount between $25 and $10,000 so the redemption value (future value) of the bond depends on the dollar amount invested and the interest rate. Interest on these bonds compounds semi-annually. (More information on US Savings bonds) Suppose that you invest $500 in a Series EE bond with a yield to maturity of 2.44%. What will be the bond's value in 8 years?

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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An investor has two alternatives: AAA-rated corporate bond or Turkish Government Treasury bond. But the investor is not sure what rate of interest these two bonds should pay. Assume that the real risk-free rate of interest is 1.5%; inflation is expected to be 2.5%; the maturity risk premium is 3.5%; and, the default risk premium for AAA rated corporate bonds is 5.5%. a) What is the "Rate of interest for the AAA-rated corporate bond" ? b) What is the "Rate of interest for the Turkish Government Treasury bond"?
True or false I. Floating/ variable rate bonds is one in which the interest payment changes with the market conditions. II. Junk or low rated bonds are rated BB or below.III. Eurobonds are bonds payable or denominated in the borrower’s currency, but sold outside the country of the borrower, usually by an international syndicate of investment bankers. IV. Treasury bonds carry the “full-faith-and-credit” backing of the government and investors consider them among the safest fixed-income investments in the world.
In the bond market you are given the following information. All amounts are in the US dollar. CF stands for cash flows and all bonds mature in Year 3. One can buy or sell only integer quantity of bonds. Based on the no-arbitrage principle, what is the price of Bond C today? In other words, what is X? Price Today CF Year 1 CF Year 2 CF Year 3 Bond A 95.00 6 6 106 Bond B 107.00 11 11 111 Bond C X 7 7 107
PIMCO gives the following example of an Inflation Linked Bond (ILB), called a Treasury Inflation Protected Security (TIPS) in the US. "How do ILBs work? An ILB’s explicit link to a nationally-recognized inflation measure means that any increase in price levels directly translates into higher principal values. As a hypothetical example, consider a $1,000 20-year U.S. TIPS with a 2.5% coupon (1.25% on semiannual basis), and an inflation rate of 4%. The principal on the TIPS note will adjust upward on a daily basis to account for the 4% inflation rate. At maturity, the principal value will be $2,208 (4% per year, compounded semiannually). Additionally, while the coupon rate remains fixed at 2.5%, the dollar value of each interest payment will rise, as the coupon will be paid on the inflation-adjusted principal value. The first semiannual coupon of 1.25% paid on the inflation-adjusted principal of $1,020 is $12.75, while the final semiannual interest payment will be 1.25% of $2,208, which…
The Malawian government has issued a bond which is currently priced at K1,200 on the stock exchange. If the yield on this bond is increased or decreased by 0.01 percent, the price value of a basis point will be the same while if the yield is decreased or increased by1 percent the price value of a basis point will not be the same. Explain why?
8. Suppose one of the ratings agencies (S&P, Moody's, Fitch) upgrades the rating of a bond from BBB to AA. a. How will this affect demand for the bond? b. How will the affect the price of the bond? C. How will the affect the cost of borrowing for the company that issues those bonds? 9. Suppose the price of a $100,000 bond falls from $98,000 to $97,000. What is the interest rate on a one-year $100,000 bond that sells for $98,000? b. What is the interest rate on a one-year $100,000 bond that sells for $97,000? a.
You would expect a bond of an Eastern European government to pay a higher interest rate as compared to a bond of the U.S. government. You would expect a bond that repays the principal in year 2040 and a bond that repays the principal in year 2020 to pay different interest rates because of differences in the bonds' credit risks You would expect a bond from Coca-Cola to pay a higher interest rate as compared to a bond from a software company you run in your garage. You would expect a bond issued by the federal government and a bond issued by New York State to pay different interest rate because of differences in the bonds terms to maturity
Interest Payments and Interest Expense for Bonds (Straight Line) Swiss Inc. sold 20-year bonds with a total face amount of $401,000 and a stated rate of 7.5%. The bonds sold for $425,000 on January 1, 2024, and pay interest semiannually on June 30 and December 31. Required: 1. Prepare the entry to recognize the sale of the bonds. If an amount box does not require an entry, leave it blank. 2024 Jan. 1 88 (Record issuance of bonds at premium.) 2. Determine the amount of the semiannual interest payment required by the bonds. Round your answer to the nearest whole dollar and use the same in subsequent calculations. 3. Prepare the journal entry made by Swiss at June 30, 2024, to recognize the interest expense and an interest payment. If an amount box does not require an entr leave it blank. 2024 June 30 88 (Record interest expense.) 4. Determine the amount of interest expense for 2024.
7. In recent news, the Bank of England (BOE) announced that it will raise interest rates as inflation in the UK reaches record highs. Required Given the expected increase in interest rates, what type of bond could a firm issue if they want the option of paying off their debt before maturity? Explain in detail. Would this type of bond be more or less desirable to the buyer of the bond? Why or why not?
I-Bonds Adjust for InflationOne of the disadvantages of bonds is that they usually offer a fixed interest rate. Once a bond isissued, its interest rate typically cannot adjust as expected inflation changes. This presents aserious risk to bond investors because if inflation rises while the nominal rate on the bondremains fixed, the real rate of return falls. The U.S. Treasury Department now offers the I-bond,which is an inflation adjusted savings bond. A Series-I bond earns interest through theapplication of a composite rate. The composite rate consists of a fixed rate that remains thesame for the life of the bond and an adjustable rate equal to the actual rate of inflation. Theadjustable rate changes twice per year and is based on movements in the Consumer PriceIndex for All Urban Consumers (CPI-U). This index tracks the prices of thousands of goods andservices, so an increase in this index indicates that inflation has occurred. As the rate of inflationmoves up and down, I-bond…
In the United States. The date is 26 July 2022. You decidethat the market has under-estimated the yield on long term Treasurybonds. You observe the following bond (in the picture). Describe how you would use this bond to trade in order to profit from your beliefs.
The US treasury issues inflation-indexed bonds known as tips. TRUE/FALSE?

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