Question

Apple Inc has a bond with $1000 face value and a coupon rate
of 8%, and Apple Inc has another bond with $1000 face value and a
coupon rate of 12%. Both bonds pay coupon payment on January 1st in
each year. Both bonds have 10-year maturities from today (January
2, 2010) and both sell at a yield to maturity of 10%. Suppose their
yields to maturity next year are still 10%.

Now, suppose you purchase two bonds today (January 2, 2010)
and hold both bonds for 1 year (until January 1, 2011).

(i) What is the rate of return on each bond? [Rate or Return
(RoR) = (Coupon income + Bond price changes)/initial investment in
the bond.]

(ii) Does the higher coupon bond provide a higher rate of
return?

Answer #1

i) Bond 1:

Using a financial calculator:

Year 1: PMT = 80, FV = 1,000, i= 10%, n= 10; compute PV0= $877.11

Year 2: PMT = 80, FV = 1,000, i= 10%, n= 9; compute PV1= $884.82

Rate of Return = (Coupon + PV1 - PV0) / PV0

= ($80 + $884.82 - $877.11) / $877.11 = $87.71/$877.11 = 10%

Bond 1:

Using a financial calculator:

Year 1: PMT = 120, FV = 1,000, i= 10%, n= 10; compute PV0= $1,122.89

Year 2: PMT = 120, FV = 1,000, i= 10%, n= 9; compute PV1= $1,115.18

Rate of Return = (Coupon + PV1 - PV0) / PV0

= ($120 + $1,115.18 - $1,122.89) / $1,122.89 = $112.29/$1,122.89 = 10%

ii). No, Both bonds provide the same rate of return.

A 10 year Treasury bond with face value of $1000 is currently
offering 8% annual coupon rate and 6% yield to maturity. Which of
the following statements about the bond is NOT true?
The market price of bond is higher than $1000.
A year from now if the yield to maturity stays the same, the
market price of the bond will be higher than what it is today.
If you buy the bond today and hold it until the bond...

What is the price of a $1000 face value zero-coupon bond with 4
years to maturity if the required return on these bonds is 3%?
Consider a bond with par value of $1000, 25 years left to
maturity, and a coupon rate of 6.4% paid annually. If the yield to
maturity on these bonds is 7.5%, what is the current bond
price?
One year ago, your firm issued 14-year bonds with a coupon rate
of 6.9%. The bonds make semiannual...

Consider a bond that pays 6% annual coupon on a face value of
$1000 and has 5 years to maturity. Suppose you buy the bond at a
time when its yield to maturity is 10%. Assumer further that
immediately after you buy the bond, the market interest rate YTM
declines to 8%. You hold the bond for two years and sell it at the
end of the second year when YTM is still 8%.
a) Calculate the annualized two year...

suppose there is a bond with 5% semi-annual coupon payments and
a face value of $1000. there are 10 years to maturity and the
yields to maturity are 7 % what is the price of this bond? show
your calculations.

The price of one-year bond (A) with zero coupon and face value $
1000 is $ 961.5. The price of two-year bond (B) with zero coupon
and face value $ 1000 is $ 907. Consider a third bond (C), a
two-year bond with $ 100 coupon paid annually and face value of $
1000.
(i) What must be the price of bond C so that the Law of One
Price holds. Explain where you use LOOP.
(ii) Suppose that the...

On January 1, 2017, you buy a three-year, annual-pay coupon bond
with 6% coupon rate, $1000 face value, and yield to maturity 6%. On
January 1, 2018, you receive the first coupon of the bond, and on
January 1, 2019, you receive the second coupon. Immediately after
receiving the second coupon, you sell the bond. Assume that yields
on bonds of all maturities are equal to 4.5% on January 1, 2019. a)
(10 points) What is the price that you...

Consider a 10-year coupon bond with a face value of $1000,
coupon payments of $50, and priced at $1020 today. Assume that you
expect its price to be $950 in 1 year. Which of the following
measures would indicate the highest rate?
Select one: Coupon rate Yield to maturity Rate of return over a
holding period of 1 year. Current yield

a) An HSBC bond has a face value of 1000, a coupon rate of 8%, 3
years until maturity and a yield to maturity of 7%. Calculate bond
duration. D= ? *[cash flowt/(1+YTM)t]}/price of bond where t is
time to maturity and YTM stands for yield to maturity. N.B: You
need to show how you have calculated duration. A single value will
not suffice.
b) HSBC has issued a 9-year bond with YTM of 10% and duration of
7.194 years....

Apple Inc. has just issued a bond with a 10-year maturity, 4%
coupon rate, and $1,000 face value. The bond carries a credit
rating of AA by the Standard & Poor’s. Investors’ required
return on bonds of similar risk is 5%. Please answer the following
questions:
1. Please calculate the price of the bond, assuming annual
coupon payments.
2. Please calculate the price of the bond, assuming semi-annual
coupon payments.
3．Suppose Standard and Poor’s suddenly upgrades the firm’s
credit rating...

A bond has a 10 year maturity, a $1000 face value, and a 7%
coupon rate. If the market requires a yield of 8% on similar bonds,
it will mostly trade at a:
A. discount
B. premium
C. discount or premium, depending on its duration
Please give example, such as calculation and so on...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 4 minutes ago

asked 4 minutes ago

asked 4 minutes ago

asked 10 minutes ago

asked 10 minutes ago

asked 12 minutes ago

asked 14 minutes ago

asked 17 minutes ago

asked 18 minutes ago

asked 24 minutes ago

asked 26 minutes ago

asked 27 minutes ago