How would you do this ? The prices of a set of zero-coupon government bonds with a face value of £100 and atime-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, £95.24, £91.57, £88.90,£87.14 and £86.26. These bonds can be assumed to be risk-free.You also observe the prices of a set of zero-coupon corporate bonds, just issued byManchester plc, each of which has a credit rating of BBB. Each bond has a face valueof £100. The prices of the bonds with time-to-maturity of 1, 2, 3, 4 and 5 years are,respectively, £88.50, £78.31, £69.31, £61.33 and £54.28.a) Using the prices of the zero-coupon government bonds, calculate the price of acoupon-bearing government bond with a face value of £10,000, a coupon rate of 5%per annum, and 5 years till maturity. Coupon payments are made at the end of eachyear only.b) Using the prices of the zero-coupon government bonds, calculate the yield-to-maturity for each of these five maturities.c) Comment on the shape of the yield curve. What does this yield curve indicate aboutthe market's prediction of future economic conditions? Explain your answer.d) Consider the zero coupon government bond with a maturity of 5 years mentionedat the start of the question. Describe how the Dirty Price of this bond will changethrough time, until maturity. Assume that its Yield to Maturity stays constant at alltimes.e) Calculate the default risk premium between the BBB yield curve and thegovernment bond yield curve, for each maturity from 1 to 5 years.f) What would happen to the prices of the zero coupon corporate bonds issued byManchester plc, if all the corporate bonds' credit ratings were downgraded to CCfrom BBB? Assume the yield to maturity of all the zero-coupon government bondsremain the same.PTO

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The prices of a set of zero-coupon government bonds with a face value of £100 and a time-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, £95.24, £91.57, £88.90, £87.14 and £86.26. These bonds can be assumed to be risk-free. You also observe the prices of a set of zero-coupon corporate bonds, just issued by Manchester plc, each of which has a credit rating of BBB. Each bond has a face value of £100. The prices of the bonds with time-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, £88.50, £78.31, £69.31, £61.33 and £54.28. a) Using the prices of the zero-coupon government bonds, calculate the price of a coupon-bearing government bond with a face value of £10,000, a coupon rate of 5%

The prices of a set of zero-coupon government bonds with a face value of £100 and a time-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, £95.24, £91.57, £88.90, £87.14 and £86.26. These bonds can be assumed to be risk-free. You also observe the prices of a set of zero-coupon corporate bonds, just issued by Manchester plc, each of which has a credit rating of BBB. Each bond has a face value of £100. The prices of the bonds with time-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, £88.50, £78.31, £69.31, £61.33 and £54.28. a) Using the prices of the zero-coupon government bonds, calculate the price of a coupon-bearing government bond with a face value of £10,000, a coupon rate of 5%

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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You are given the following details of three default free government bonds. Assume that one can take long (buy) and short (sell) positions in these bonds. CF stands for cash flow. Bond Current price Today CF Year 1 CF Year 2 A 95.24 100 0 B 89.85 0 100 C X 70 1070 Assuming that the current market prices of Bond A and Bond B are correct, then, what should be the current theoretical (fundamental) price of Bond C, as per the no-arbitrage principle, i.e., what is the value of X? [Do not round-off any numbers. If at all you want to round-off a number, round it off at 8 decimal places.]
A particular security’s equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 3.5 percent. The security’s liquidity risk premium is .25 percent and maturity risk premium is .85 percent. The security has no special covenants. Calculate the security’s default risk premium. You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants.The Wall Street Journal reports that one-year T-bills are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real interest rate " 2.25% Default risk premium " 1.15% Liquidity risk premium " 0.50% Maturity risk premium " 1.75% What is the inflation premium? What is the fair interest rate on Moore Corporation 30-year bonds?
Please see attached. Definitions: Yield to maturity (YTM) is the return the bond holder receives on the bond if held to maturity. Treasury note is a U.S. government bond with a maturity of between two and ten years. Current yield is the annual bond coupon payment divided by the current price.
Suppose you are a bond dealer looking for arbitrage opportunities. The first column in the table below shows the current prices of the four government bonds (without default risk). Assume that you can buy and short these bonds at a given price. The remaining columns of the table are the cash flows generated by the bonds at the end of the first, second and third years. All bonds mature at the end of the third year. Are there arbitrage opportunities for the prices of these four types of bonds? If it exists, how can you seize this opportunity?
不 The following table summarizes the yields to maturity on several one-year, zero-coupon securities: a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating? b. What is the credit spread on AAA-rated corporate bonds? c. What is the credit spread on B-rated corporate bonds? d. How does the credit spread change with the bond rating? Why? a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating? The price of this bond will be ☐ %. (Round to three decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Important: The yields displayed are annually compounded yields. Security Treasury Yield (%) 3.09 AAA corporate 3.21 BBB corporate 4.24 B corporate 4.93 Print Done - X
Use the following zero-coupon bond prices to answer the next questions: Days to Maturity Zero-Coupon Bond Price 90 180 270 360 0.99009 0.97943 0.96525 0.95238 Suppose you are the counterparty for a lender who enters into an FRA to hedge the lending rate on $10m for a 90-day loan commencing on day 270. What positions in zero-coupon bonds would you use to hedge the risk on the FRA?
The following table summarizes the yields to maturity on several one-year, zero-coupon securities: . a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating? b. What is the credit spread on AAA-rated corporate bonds? c. What is the credit spread on B-rated corporate bonds? d. How does the credit spread change with the bond rating? Why? Data table e bond with a AAA rating? (Click on the following icon a in order to copy its contents into a spreadsheet.) Important: The yields displayed are annually compounded yields. Security Yield (%) 3.14 Treasury AAA corporate ВBB сoгрorate В согрoгate 3.23 4.28 4.89 Print Done
A security with higher risk will have a higher expected return. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates. Based on the graph, which of the following statements is true? Both bonds have equal interest rate risk. The 10-year bond has more interest rate risk. Neither bond has any interest rate risk. The 1-year bond has more interest rate risk. Frank Barlowe is retiring soon, so he’s concerned about his investments providing him with a steady income every year. He’s aware that if interest rates , the potential earnings power of the cash flow from his investments will increase. In particular, he is concerned that a decline in interest rates might lead to annual income from his investments. What kind of risk is Frank most concerned about protecting…
A bond is currently selling for $880. This indicates that this bond is _____, and you would expect that the coupon rate would be _____ than the current market rate. Attractive; greater than Attractive; less than Unattractive; greater than Unattractive; less than
Suppose you want to figure out the relationship between duration and maturity, so you consider the following three T-Bonds. You compute a. The duration of a two-year Treasury bond with a 10 percent semiannual coupon selling at par b. The duration of a three-year Treasury bond with a 10 percent semiannual coupon selling at par c. The duration of a four-year Treasury bond with a 10 percent semiannual coupon selling at par
You are given the following prices and cash flows associated with bonds. CF stands for cash flow. Bond Price Today CF Year 1 CF Year 2 CF Year 3 A 105.185 10 10 110 B 90.371 100 0 0 C 91.784 5 105 0 D X 15 15 115 What is the current price of Bond D as per the no-arbitrage principle? In other words, what is the value of X?
Assume that the real, risk-free rate of interest is expected to be constant over time at 3 percent, and that the annual yield on a 6-year corporate bond is 8.00 percent, while the annual yield on a 10-year corporate bond is 7.75 percent: you may assume that the default risk and liquidity premium are the same for both bonds. Also assume that the maturity risk premium for all securities can be estimated as MRP, (0.1%) *(t-1), where t is the number of periods until maturity. Finally assume that inflation is expected to be constant at 3 percent for Years 1-6, and then constant at some rate for Years 7-10 (4 years). Given this information, determine what the market must anticipate the average annual rate of inflation will be for Years 7-10. 2.583% O 1979% 2.281% 1.375 % O 1.677 % 4

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