Assume you have a 1-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rate and pays the $80 coupon once per year. The third has a 10% coupon rate and pays the $100 coupon once per year. 1. If all three bonds are now priced to yieid 89% to maturity, what are their prices? 2. if you expect their yields to maturity to be 89% at the beginning of next year, what will their prices be then? What is your before-tax holding-period return on each bond? if your tax bracket is 30% on ordinary income and 209% on capital gains income, what will your after-tax rate of return be on each? 3. Recalculate your answer to (2) under the assumption that you expect the yields to maturity on each bond to be 7% at the beginning of next year.

Assume you have a 1-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rate and pays the $80 coupon once per year. The third has a 10% coupon rate and pays the $100 coupon once per year. 1. If all three bonds are now priced to yieid 89% to maturity, what are their prices? 2. if you expect their yields to maturity to be 89% at the beginning of next year, what will their prices be then? What is your before-tax holding-period return on each bond? if your tax bracket is 30% on ordinary income and 209% on capital gains income, what will your after-tax rate of return be on each? 3. Recalculate your answer to (2) under the assumption that you expect the yields to maturity on each bond to be 7% at the beginning of next year.

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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Assume you have a 1-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rate and pays the $80 coupon once per year. The third has a 10% coupon rate and pays the $100 coupon once per year.a. If all three bonds are now priced to yield 8% to maturity, what are the prices of: (i) the zero-coupon bond; (ii) the 8% coupon bond; (iii) the 10% coupon bond?b. If you expect their yields to maturity to be 8% at the beginning of next year, what will be the price of each bond?c. What is your before-tax holding-period return on each bond? d. If your tax bracket is 30% on ordinary income and 20% on capital gains income, what will be the after-tax rate of return on each bond?e. Recalculate your answers to parts (b)–(d) under the assumption that you expect the yields to maturity on each bond to be 7% at the…
Assume you have a 1-year investment horizon and are trying to choose among threebonds. All have the same degree of default risk and mature in 10 years. The first is azero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rateand pays the $80 coupon once per year. The third has a 10% coupon rate and paysthe $100 coupon once per year.1. If all three bonds are now priced to yield 8% to maturity, what are their prices?2. If you expect their yields to maturity to be 8% at the beginning of next year, whatwill their prices be then? What is your before-tax holding-period return on eachbond? If your tax bracket is 30% on ordinary income and 20% on capital gainsincome, what will your after-tax rate of return be on each?3. Recalculate your answer to (2) under the assumption that you expect the yields tomaturity on each bond to be 7% at the beginning of next year.
Assume you have a 1-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 7.6% coupon rate and pays the $76 coupon once per year. The third has a 8.6% coupon rate and pays the $86 coupon once per year. a. If all three bonds are now priced to yield 6% to maturity, what are the prices of: (i) the zero-coupon bond; (ii) the 7.6% coupon bond; (iii) the 8.6% coupon bond? Answer to a Current Prices Zero Coupon= $558.39 7.6% = $1117.76 8.6%= $1191.36 Need answers to part d and e
Solve each of the following questions using both pricing formulas and Excel. 2. A zero-coupon bond has a face value of $21,000 and a maturity of 8 years. Similar bonds have an interest rate of 5% per year. What is the price of this bond?
Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has a 7.5% coupon rate and pays the $75 coupon once per year. The third has a 9.5% coupon rate and pays the $95 coupon once per year. Assume that all bonds are compounded annually. a. If all three bonds are now priced to yield 7.5% to maturity, what are their prices? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. If you expect their yields to maturity to be 7.5% at the beginning of next year, what will their prices be then? (Do not round intermediate calculations. Round your answers to 2 decimal places.) c. What is your rate of return on each bond during the one-year holding period? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 8 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 8.2% coupon rate and pays the $82 coupon once per year. The third has a 10.2% coupon rate and pays the $102 coupon once per year. Assume that all bonds are compounded annually. Required: a. If all three bonds are now priced to yield 8.2% to maturity, what are their prices? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. If you expect their yields to maturity to be 8.2% at the beginning of next year, what will their prices be then? (Do not round intermediate calculations. Round your answers to 2 decimal places.) c. What is your rate of return on each bond during the one-year holding period? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
You want to form a bond portfolio that pays $100 every six months, for the next year. That is, $100 in 0.5 years and $100 in 1 year. To achieve this goal, you will purchase Bonds A and B, which have a face value of $100 and pay semi-annual coupons. The following information is available: Bond A • Coupon rate (APR): 4.3% Maturity: 1 year Bond B • Coupon rate (APR): 9.5% • Maturity: 1 year Calculate the number of units you must buy of Bond B to achieve your goal. Express your answer as a number with two decimals. E.g. If your answer is 102.544, then enter it as 102.54
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?
You want to invest in a bond for one year, and are deciding between the following two choices - Bond A and Bond B, both of which have a maturity of 1 year and a par value of $1,000.Bond A is a regular(i.e., nominal- return) with a couponrate of 3% per year, payable semi-annually. The current price of Bond A is $998. Bond B is a real-return bond with a coupon rate of 2% per year, payable annually. The current price of Bond B is $1,000. What is the inflation rate (over the next year) that will make the (nominal) ratesof return of the two choices the same?
Consider a coupon bond with an 8% annual coupon rate, a 10% interest rate, and a$1000 face value. The bond will mature in 4 years. What is the duration of this bond? Duration isdefined as a weighted average of the maturities of the cash payments. Suppose the weightassigned to the maturity of 1 year is W. Show your work A: Duration=2.28 and W=7.77%B: Duration=3.56 and W=20.5%C. Duration=3.56 and W=23.1%D. Duration=3.56 and W=7.77%
Suppose you buy a bond with 3 years to maturity. The face value is 1000 and the coupon rate is 12 %. Assume after holding the bond for one year the market interest rate falls to 8 % a. What will be the new price of your bond? b. What will be the annual rate of return on your bond? c. Discuss the interest rate risk on bonds using your results in parts (a) and (b)?
Consider that you have in your portfolio a 3-year 3% coupon bond with face value of $100. The coupons of this bond are paid semi-annually. We assume that the current yield to maturity on the bond is 4% per annum with continuous compounding. a. Could you please first describe the two concepts of bond duration and convexity? Then, please compute the duration and the convexity of the bond described above? b. You expect a steepening of the interest rates yield curve very soon, either through a bull steepening or a bear steepening. Could you please first define these two market phenomena and then propose strategies taking advantage of such market environments given your existing portfolio?

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