Question

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 expect to happen to the price of the bond in the near future? Explain

- Suppose the bond is being offered at $930. Would you buy the bond? What do you expect to happen to the bond price in the near future? Explain

- What will happen to the yield of this bond when the price increases? Explain

Answer #1

Solution

a. Present value of bond= Present value of coupon payment year 1+Present value of coupon payment year 2+Present value of principal repaid year 3

Present value formula= Cashflow/(1+r)^n

where

r= rate of discounting=8% in this case

n= year of cashflow

Present value of bond=100/(1+.08)^1+100/(1+.08)^2+1000/(1+.08)^3

**Present value of bond=972.1587**

b. Now if the bond is offered at 1100 ,it is advisable not to buy the bond as the return of the bond will fall below the market interest rate of 8% if bought at 1100.

If the bond is bought at 1100, the price of the bond will fall in near future term as the market interest rates will be higher than return on the bond,thus correspondingly the market price of bond will fall

c. If the bond is offered at 930, the return on the bond will be higher than that of the market interest rate ,thus it is advisable to buy the bond at 930

Since the return of the bond is higher than market interest rate,in the near term the price of the bond will increase so that the market interest rate come in equilibrium with the return on bond

d. In tis case Price of bond=100/(1+YTM)^1+100/(1+YTM)^2+1000/(1+YTM)^3

Where YTM=Yield to maturity

Now if the price increases the Yield will decrease ,as it can be seen from the above equation that YTM is inversely propotional to Market price of bond

**If you are satisfied with the answer,please give a
thumbs up**

Consider two investment options: • A U.S. 10-year treasury bond
promises to pay you $50 per year for 10 years and then return $1000
principal amount • A North Korean 10-year bond with the same cash
flow structure; that is, 50 per year and 1000 at maturity Which
bond would you expect to be more expensive? Explain your answer in
terms of risk and return and by referring to the components of the
YTM of a bond.

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?

Your friend promises you a perpetuity of $1 every year, which
starts in year 1. However, your friend is an absent-minded guy,
paying you $2 at year 10 but no payment at year 9. Except for these
two years, in other years, the payment is always $1. Which of the
following statements is true?
Select one: a. your friend is better off for his being
absent-minded
b. you are better off for his being absent-minded
c. there is no difference...

2. A high-yield bond with the following features:
Principal
$1,000
Coupon
8%
Maturity
7 years
Special Features
company may extend the life of the bond to 14 years
The current interest rate is 6%.
a) If you expect that interest rates will be 8 percent five
years from now, how much would you currently pay for this bond?
b) What is your potential gain or loss if you buy the bond based
on that expectation but interest...

Question 2
2a) Suppose a risk-free bond promises
to pay $2,249.73 in 4 years. If the going risk-free
interest rate is 3.5%, how much is the bond worth
today?
Nper
Rate
PMT
FV
PV
2b) Suppose you can buy a U.S. Treasury
bond which makes no payments until the bond matures 10 years from
now, at which time it will pay you $1,000. What interest rate would
you earn if you bought this bond for $585.43?
Nper
PMT
PV
FV
Rate...

5. Imagine that a $10,000 ten-year bond was issued at an
interest rate of 6%. You are thinking about buying this bond one
year before the end of the ten years, but interest rates are now
9%.
a. Given the change in interest rates, would you expect to pay
more or less than $10,000 for the bond?
b. Calculate what you would actually be willing to pay for
this bond.

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...

Now consider a four-year bond with a face value of $5,000 and
an annual coupon payment of $125. Suppose prevailing interest rates
in the economy are 1.0%.
Calculate the predicted price of this bond. Did the price
change by more or less than what you found in part a of
the previous question?
Given your answer to part a, which would you rather
hold if interest rates in the economy are expected to increase:
long-term bonds or short-term bonds? Why?

Suppose that you purchased a bond with a 4.9 percent coupon rate
for $930 today. The bond matures in ten years and makes semiannual
coupon payments.
Required:
a. What rate of return, expressed as an APR, do you expect to
earn on your investment if you plan to hold it until maturity?
b. Two years from now, the yield-to-maturity on your bond has
declined by 1 percentage point, and you decide to sell. How much
will you get for your...

You buy a 30 year bond that pays a 4% coupon for par (100% of
face value), almost instantaneously the Federal Reserve Bank
announces a rate hike which now means that the same bond would be
issued with a 6% coupon. So how much do you lose if you were to
sell your bond? Hint: you are solving for a PV and 6% is your rate
or “I”.

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 25 minutes ago

asked 38 minutes ago

asked 49 minutes ago

asked 49 minutes ago

asked 52 minutes ago

asked 56 minutes ago

asked 57 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago