EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 6, Problem 8P
Summary Introduction
To determine: The
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You are considering the purchase of a perpetual bond that pays you $174 per year for the foreseeable future. If you require a 5.85% rate of return on this bond investment, what is a fair price for the bond that you would be willing to pay today? To nearest $0.01
(b)You purchase the $110 bond today and sell it off next year at $108. What is its one-year rate of return (assume the bond’s coupon rate is 5% and its face value is $100)?
If the expected inflation over the course of the year is 2%, what would the ex-ante real rate of return be for the bond on part (b)?
Suppose you purchase a 10-year bond with 6.64% annual coupons. You hold the bond for 4 years, and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 5.17%
when you purchased and sold the bond,
a. what cash flows will you pay and receive from your investment in the bond per $100 face value?
b. what is the annual rate of return of your investment?
a. What cash flows will you pay and receive from your investment in the bond per $100 face value?
The cash flows from the investment are shown in the following timeline: (Round to the best choice below.)
OA. Years
Cash Flows
O B. Years
C. Years
Cash Flows
Cash Flows - $114.06
O D. Years
0
Cash Flows
$107.42
0
0
- $111.26
0
$111.26
1
$6.64
1
$6.64
1
$6.64
1
$6.64
2
$6.64
2
+
$6.64
2
+
$6.64
2
+
$6.64
3
$6.64
3
$6.64
3
$6.64
3
$6.64
b. What is the annual rate of return of your investment?
The annual rate of return of your investment is %. (Round to two decimal places.)
4
$114.06
4
$107.42
4
$114.06
4…
Chapter 6 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 6 - Prob. 1QTDCh. 6 - Prob. 2QTDCh. 6 - Prob. 3QTDCh. 6 - Prob. 4QTDCh. 6 - Prob. 5QTDCh. 6 - Prob. 6QTDCh. 6 - Prob. 7QTDCh. 6 - Prob. 8QTDCh. 6 - Prob. 9QTDCh. 6 - Prob. 11QTD
Ch. 6 - Prob. 12QTDCh. 6 - Prob. 13QTDCh. 6 - Prob. 14QTDCh. 6 - Prob. 15QTDCh. 6 - Prob. 16QTDCh. 6 - Prob. 17QTDCh. 6 - Prob. 1PCh. 6 - Prob. 2PCh. 6 - Prob. 3PCh. 6 - Prob. 4PCh. 6 - Prob. 5PCh. 6 - Prob. 6PCh. 6 - Prob. 7PCh. 6 - Prob. 8PCh. 6 - Prob. 9PCh. 6 - Prob. 10PCh. 6 - Prob. 11PCh. 6 - Prob. 12PCh. 6 - Prob. 13PCh. 6 - Prob. 14PCh. 6 - Prob. 15PCh. 6 - Prob. 16PCh. 6 - Prob. 17PCh. 6 - Prob. 18PCh. 6 - Prob. 19PCh. 6 - Prob. 20PCh. 6 - Prob. 21PCh. 6 - Prob. 22PCh. 6 - Prob. 23PCh. 6 - Prob. 24PCh. 6 - Prob. 25PCh. 6 - Prob. 26PCh. 6 - Prob. 27P
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- Suppose you purchase a 10-year bond with 6.19% annual coupons. You hold the bond for 4 years, and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 5.34% when you purchased and sold the bond, a. what cash flows will you pay and receive from your investment in the bond per $100 face value? b. what is the annual rate of return of your investment? a. What cash flows will you pay and receive from your investment in the bond per $100 face value? The cash flows from the investment are shown in the following timeline: (Round to the best choice below.) A. Years 2 3 Cash Flows $106.46 $6.19 $6.19 $6.19 $110.46 B. Years 0 2 3 4 Cash Flows - $106.46 $6.19 $6.19 $6.19 $110.46 C. Years 0 1 2 3 4 Cash Flows $104.27 $6.19 $6.19 $6.19 $110.46 D. Years 0 2 3 4 + $6.19 $6.19 $6.19 $104.27 Cash Flows - $110.46 b. What is the annual rate of return of your investment? The annual rate of return of your investment is %. (Round to two decimal places.)arrow_forwardSuppose you purchase a 10-year bond with 6.19% annual coupons. You hold the bond for 4 years, and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 5.34% when you purchased and sold the bond, a. what cash flows will you pay and receive from your investment in the bond per $100 face value? b. what is the annual rate of return of your investment? a. What cash flows will you pay and receive from your investment in the bond per $100 face value? The cash flows from the investment are shown in the following timeline: (Round to the best choice below.) A. Years 0 2 3 4 Cash Flows $106.46 $6.19 $6.19 $6.19 $110.46 B. Years 0 2 3 4 Cash Flows - $106.46 $6.19 $6.19 $6.19 $110.46 ○ C. Years 0 2 3 4 Cash Flows $104.27 $6.19 $6.19 $6.19 $110.46 D. Years 0 2 3 4 Cash Flows - $110.46 $6.19 $6.19 $6.19 $104.27 b. What is the annual rate of return of your investment? The annual rate of return of your investment is %. (Round to two decimal places.)arrow_forwardWhat should be the current price of a 3-year maturity bond with a 12% coupon rate paid annually? And if you purchase the coupon bond at the price you calculated in the above, what would your total expected rate of return over the next year be (coupon plus price change)? Ignore taxes.arrow_forward
- Consider a bond with a face value of $2,000 that pays a coupon of $150 for 10 years. Suppose the bond is purchased at $500, and can be resold next year for $400. What is the rate of return of the bond? What is the yield to maturity of the bond?arrow_forwardYou purchase a 6%, 20-year annual coupon bond for its face value. You will hold this bond for two years in your portfolio (till you receive coupon payments for both years), after which you will sell it. After two years, the market rate is 7%. How much will your bond sell for? What will be your percentage return? a. $899.41 and 1.94% respectively b. $1,000 and 0% respectively c. $899.41 and -4.06% respectively d. $894.06 and 1.41% respectivelyarrow_forwardIf you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3 years later if interest rates have remained stable?arrow_forward
- You are considering investing in a zero coupon bond that will pay you its face value of$1000 in ten years. If the bond is currently selling for $485.20, whag is the IRR for investing in this bond?arrow_forwardSuppose you purchase a 10-year bond with 6.3% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 4.6% when you purchased and sold the bond, A)What cash flows will you pay and receive from your investment in the bond per $100 face value? B)What is the annual rate of return of your investment?arrow_forwardSuppose you purchase a 10-year bond with 6.1 % annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 4.7 % when you purchased and sold the bond, a. What cash flows will you pay and receive from your investment in the bond per $ 100 face value? b. What is the annual rate of return of your investment?arrow_forward
- Example: You buy a 10-year maturity bond for the face value of $1,000 when the current interest rate is 9%. A year later, you sell the bond for $980. Assuming annual coupon payment, a. What is the new yield to maturity on the bond when you sell the bond? b. What's your holding period return during the year?arrow_forwardSuppose that you buy a TIPS (inflation-indexed) bond with a 1-year maturity and a coupon of 2% paid annually. Assume you buy the bond at its face value of $1,000, and the inflation rate is 10%. a. What will be your cash flow at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What will be your real return? c. What will be your nominal return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)arrow_forwardYou spend $725.00 to purchase a $1,000 bond that will have no coupon payments and matures in 12 years. What interest rate will you be earning on this bond?arrow_forward
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