Question

3. Suppose a bond you hold promises to pay you $150 each year for the next five years.

(a) What type of bond are you holding?

(b) What is the present value of this bond if the market interest rate is 4% and the bond is considered riskless?

(c) If the risk premium is equal to 5%, what is the present value of this bond? Would you purchase this bond if it was offered to you for $550?

Answer #1

Ans:

a) This is a coupon bond. coupon bonds are bearer bonds and the bond holder receives annual interest.

b) Present value of the bond is the present of future cash flow expected to arise from the bond.

Discounting factor = 1 / (1+i)^n

Present value of the bond = $150 * sum of discounting factor for year 1 to year 5@4%

= $150 * 4.4518

= $667.77

c) when risk premium is 5%, discounting rate is 9% .i.e(4%+5%)

Present value of the bond = $150 * sum of discounting factor for year 1 to year 5@9%

= $150 * 3.8896

= $583.44

Since the purchase price is less than the present value of the bond , purchasing the bond is recommended.

A zero-coupon bond has a beta of 0.3 and promises to pay $1000
next year with a probability of 95%. If the bond defaults, it will
pay nothing. One -year Treasury securities are yielding 2%, and the
equity premium is 5%. What is the fair market value for this bond
investment? $918 $950 $1,000 $956

Suppose that at t=0, you purchase a six year, 8% coupon bond
paid annually that is priced to yield 9%. The face value of the
bond is $1000.
a) What will be your holding period return if you decide to hold
the bond til its maturity and the market interest rate remains
constant at 9% throughout your holding period of 6 years? b) What
will be your holding period return if you decide to hold the bond
til its maturity,...

1. A one-year discount bond promises to pay 132,000 dollars next
year. Brad requires a 20% rate of return from this bond. In other
words, if he thinks that the rate of return from this bond is less
than 20%, he will not buy it. Another way of saying the same thing
is that, Brad is not willing to pay a penny more than ______
dollars for this bond.
2. Suppose that a special bank account is paying an annual...

A zero-coupon bond has a beta of 0.1 and promises to pay $1,000
next year with a probability of 98%. If the bond defaults, it will
pay nothing. One-year Treasury securities are yielding 5%, and the
equity premium is 7%. What is the time premium for this bond
investment?

Imagine a bond that promises to make
coupon payment of $100 one year from now and $100 two years from
now, and to repay the principal of $1000 3 years from now. Assume
also that the market interest rate is 8 percent per year, and that
no perceived risk is associated with the bond.
Compute the present value of this bond
Suppose the bond is being offered for $1100 would you buy the
bond at that price? What do you...

An investment will pay $150 at the end of each of the next 3
years, $250 at the end of Year 4, $300 at the end of Year 5, and
$600 at the end of Year 6. If other investments of equal risk earn
12% annually, what is its present value? Its future value? Do not
round intermediate calculations. Round your answers to the nearest
cent.
Present value: $
Future value: $

An investment will pay $150 at the end of each of the next 3
years, $200 at the end of Year 4, $300 at the end of Year 5, and
$600 at the end of Year 6. If other investments of equal risk earn
11% annually, what is its present value? Its future value? Do not
round intermediate calculations. Round your answers to the nearest
cent. Present value: Future value:

An investment will pay $150 at the end of each of the next 3
years, $200 at the end of Year 4, $300 at the end of Year 5, and
$600 at the end of Year 6. If other investments of equal risk earn
9% annually, what is its present value? Its future value? Do not
round intermediate calculations. Round your answers to the nearest
cent.
Present value: $
Future value: $

An investment will pay $150 at the end of each of the next 3
years, $250 at the end of Year 4, $400 at the end of Year 5, and
$600 at the end of Year 6. If other investments of equal risk earn
8% annually, what is its present value? Round your answer to the
nearest cent. $ If other investments of equal risk earn 8%
annually, what is its future value? Round your answer to the
nearest cent.

An investment will pay $150 at the end of each of the next 3
years, $250 at the end of Year 4, $350 at the end of Year 5, and
$600 at the end of Year 6.
If other investments of equal risk earn 9% annually, what is its
present value? Round your answer to the nearest cent.
If other investments of equal risk earn 9% annually, what is its
future value? Round your answer to the nearest cent.

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 6 minutes ago

asked 20 minutes ago

asked 20 minutes ago

asked 25 minutes ago

asked 28 minutes ago

asked 28 minutes ago

asked 34 minutes ago

asked 37 minutes ago

asked 38 minutes ago

asked 38 minutes ago

asked 40 minutes ago

asked 43 minutes ago