Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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You want to purchase a bond that will pay you $300 per year for the next four years. If the annual interest rate is 4%, then what is the price of your bond if the market is in equilibrium?
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You buy a stock that is expected to pay a dividend of $300 per year for the next four years. If the discount rate is 5.5%, then what is the stock price in this case? Is this result the one you would expect when comparing this answer to the one you obtained in question 3? Why or why not?
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- The yield curve currently observed in the market is as follows: y1 = 7%, Y2 = 8%, and yz = 9%. You are trying to decide between buying a two-year bond (Bond A) and three-year bond (Bond B), each of which is default-risk free and pays annual coupons of 8% per year. You strongly believe that yield curve in one year will become flat at 9%. Which one of the two bonds should you buy today if you plan to sell this bond in exactly one year (right after you receive the first coupon payment)? Assume interest is compounded annually, and each bond has a face value of $1,000. Bond B O Neither bond -- The expected total return of both bonds will be negative if interest rates increase to 9% in one year Bond A Both bonds provide the same return over a one year investment horizon A portfolio that invests 50% of your wealth in each bond provides the highest total expected returnarrow_forwardSuppose you bought a 10 year coupon bond with par value $500 and coupon rate 6%. What is the market price of this bond two years later if the current yield is 1.5%?arrow_forwardSuppose you purchased a ten-year, 8% coupon bond(annual coupon payment) at $980. Two years later, you decide to take a vacation and sell the bond to acquire the necessary funds. At the time you sell the bond, eight-year bonds with similar characteristics sell for yields of 9%. What is your realized yield on the bond?arrow_forward
- If you purchased a bond one year ago for $1000 and just sold it for $1100 after receiving the $50 annual coupon payment, then what was your real return on the investment if theinflation rate was 2.1% for the same year?arrow_forwardThe 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 an annual coupon bond with a coupon rate of 8 3 percent for $785 The bond has 8 years to maturity and a par value of $1,000. What rate of return do you expect to earn on your investment? Note: 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 price will your bond sell for? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b-2. What is the HPY on your investment? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. Rate of return b-1. Price % b-2. Holding period…arrow_forwardUSE THE FOLLOWING INFORMATION FOR THE NEXT 3 QUESTIONS: Part 1 of 3: Assume that you purchase a 30-year $1,000 par value bond, with a 10% coupon, and a yield of 9%. Immediately after you purchase the bond, yields change to 7% and remain at that level to maturity. Assume that you hold the bond for 8 years and then sell it. Interest is paid annually. What is the price of the bond today? Group of answer choices A. $1,991.87 B. $1,538.14 C. $1.732.51 D. $1,102.74 E. $1,225.16arrow_forward
- At the beginning of the year, you bought a $1,000 par value corporate bond with an annual coupon rate of 8 percent and a maturity date of 19 years. When you bought the bond, it had an expected yield to maturity of 13 percent. Today the bond sells for $ 760. 1. What did you pay for the bond? 2. If you sold the bond at the end of the year, what would be your one-period return on the investment? Assume that you did not receive any interest payment during the holding period.arrow_forwardAssume you purchase a 20-year zero coupon bond with a yield of 5%. One year later the yield drops 50 basis points. calculate the holding period return Please show how to solve it using a financial calculatorarrow_forwardYou 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 questionarrow_forward
- Suppose you are interested in buying a 1.5% semi-annual coupon treasury bond maturing in exactly 10 years. You think appropriate discount rate for this bond (aka yield to maturity or YTM) is 3%. How much should you pay for this bond if its par value is $1,000?arrow_forwardAn investor is considering the purchase of a(n) 6.000%, 15-year corporate bond that's being priced to yield 8.000%. She thinks that in a year, this bond will be priced in the market to yield 7.000%. Using annual compounding, find the price of the bond today and in 1 year. Next, find the holding period return on this investment, assuming that the investor's expectations are borne out. The price of the bond today is $ (Round to the nearest cent.)arrow_forwardAssume 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.arrow_forward
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