One month ago, an investor entered into a forward agreement to sell a bond in three months' time at a price of $100. The current spot price for the bond is $101.50. Suppose the term structure of interest rates is such that the 1-month spot rate is 2%, the 2-month spot rate is 4% and the 3-month spot rate is 6%. Assume all interest rates are based on continuous compounding. a. Given the above information, what is the value of the investor's position assuming the bond does not pay a coupon? b. Suppose instead the bond pays a 5% coupon and the next coupon payment is one month from today. In that event, what is the value of the investor's position?

One month ago, an investor entered into a forward agreement to sell a bond in three months' time at a price of $100. The current spot price for the bond is $101.50. Suppose the term structure of interest rates is such that the 1-month spot rate is 2%, the 2-month spot rate is 4% and the 3-month spot rate is 6%. Assume all interest rates are based on continuous compounding. a. Given the above information, what is the value of the investor's position assuming the bond does not pay a coupon? b. Suppose instead the bond pays a 5% coupon and the next coupon payment is one month from today. In that event, what is the value of the investor's position?

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 that a bond will make payments every six months as shown on the following timeline (using six- month periods): Period Cash Flows a. What is the maturity of the bond (in years)? b. What is the coupon rate (as a percentage)? c. What is the face value? $19.36 2 $19.36 CHE a. What is the maturity of the bond (in years)? The maturity is years. (Round to the nearest integer.) 19 $19.36 20 $19.36+ $1,000
A bond has following characteristics: it was issued on 14.06.2018 and has 10 years to maturity. Coupon is paid semi-annually and carries interest rate of 3,2%. Market interest rate is currently 2,9% for similar issues. Investor purchased the bond on 19.11.2021. a. Calculate MacDuration b. Calculate ModDuration c. When market interest rates increase by 50 basis points, calculate price effect using results obtained in question (b)
Suppose that the term structure of interest rates is: Interest rates are annual interest rates that are semi-annually compounded. Calculate the price and modified duration of a 1 -year bond with a 6% coupon rate, with coupons paid semi-annually. The bond has a face value of 100.0 Calculate the price and modified duration of a 2 -year bond with a 10% coupon rate, with coupons paid semi-annually. The bond has a face value of 100.0 Compare your results from 1 and 2 above. Which bond is more sensitive to changes in interest rates?
Assume that a bond will make payments every six months as shown on the following timeline (using six- month periods): Period 0 Cash Flows $20.87 a. What is the maturity of the bond (in years)? b. What is the coupon rate (as a percentage)? c. What is the face value? 2 $20.87 *** a. What is the maturity of the bond (in years)? The maturity is years. (Round to the nearest integer.) 39 $20.87 40 $20.87 + $1,000
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Price $983.78 865.89 797.92 732.00 660.24 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4?
Assume that a bond will make payments every six months as shown on the following timeline (using six-month periods): 0 2 Period Cash Flows 1 $20.73 a. What is the maturity of the bond (in years)? b. What is the coupon rate (as a percentage)? c. What is the face value? $20.73 a. What is the maturity of the bond (in years)? The maturity is years.. (Round to the nearest integer.) 19 $20.73 .... 20 $20.73 + $1,000
Suppose that the current 6-month, 1-year, 1.5-year and 2-year interest rates are 2.2%,3%, 3.5% and 3.75%, respectively. a) Calculate the prices of a 1-year and 2-year Treasury bonds. In each case, assumethe face value of £100 and the coupon rate of 5% per annum and that coupons arepaid semi-annually. Assume continuous compounding. Compare the obtainedresults. Are they consistent with your expectations? b) Calculate the par yield on the 1-year bond with semi-annual coupons
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The following is certain information about three bonds. All numerical answers should be calculated to at least two decimal places. By convention, the face value of all bonds is taken as $100. For simplicity, assume coupon payments are paid once a year. Bond A: coupon rate = 9.75%, term to maturity=10 years, current price = $160.55. Bond B: coupon rate = 11.25%, term to maturity=5 years, yield to maturity =2.35% p.a. Bond C: coupon rate = 6%, term to maturity = 1 year, yield to maturity = 1.45% p.a. Find the current price of Bond B. From your answer, what do say about this price when compared with the face value of the bond?
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A bond currently sells for $1,080, which gives it a yield to maturity of 7%. Suppose that if the yield increases by 50 basis points, the price of the bond falls to $1,050. What is the duration of this bond? (Do not round intermediate calculations. Round your answer to decimal places.) Duration years

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