Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Question
I must use formulas and cell references PV of Payments when computing all values in the green cells
You own a $1,000-par zero-coupon bond that has 5 years of remaining maturity.
You plan on selling the bond in one year and believe that the required yield next year will have the following probability distribution in the table highlighted in yellow color.
2a (7.5 points). What is your expected price when you sell the bond?
2b (7.5 points). What is the standard deviation?
Transcribed Image Text:Problem 2 (20 points): You own a $1,000-par zero-coupon bond that has 5 years of remaining maturity.
You plan on selling the bond in one year and believe that the required yield next year will have the following probability distribution in the table highlighted in yellow color.
2a (7.5 points). What is your expected price when you sell the bond?
2b (7.5 points). What is the standard deviation?
Solution:
The expected price is:
The standard deviation is:
Probability
Required Yield
Price
Prob * Price
Prob* (Price - Exp. Price)²
0.1
6.60%
0.2
6.75%
0.4
7.00%
0.2
7.20%
0.1
7.45%
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