Question

#1) Cy owns investment A and 1 bond B. The total value of his holdings is 900 dollars. Bond B has a coupon rate of 4.9 percent, par value of $1000, YTM of 10.5 percent, 22 years until maturity, and semi-annual coupons with the next coupon due in 6 months. Investment A is expected to produce annual cash flows forever. The next cash flow is expected to be 60.4 dollars in 1 year, and subsequent annual cash flows are expected to increase by 3.33 percent each year forever. What is the expected return for investment A? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

#2) Castor owns one bond A and one bond B. The total value of these two bonds is 2,413.75 dollars. Bond A pays semi-annual coupons, matures in 18 years, has a face value of 1,000 dollars, and pays its next coupon in 6 months. Bond B pays annual coupons, matures in 14 years, has a face value of 1,000 dollars, has a yield-to-maturity of 5.46 percent, and pays its next coupon in one year. Both bonds have a coupon rate of 10.46 percent. What is the yield-to-maturity for bond A? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

by hand or calclator plzz THANKYOU! :D

Answer 1

(1) Fair Value of Investment A + Bond B = $ 900

Bond B: YTM = 10.5 % per annum, Coupon Rate = 4.9 % payable semi-annually, Tenure = 22 years or 44 half-years and Par Value = $ 1000

Semi-Annual Bond Coupon = 0.049 x 1000 x 0.5 = $ 24.5

Bond Price = 24.5 x (1/0.0525) x [1-{1/(1.0525)^(44)}] + 1000 / (1.0525)^(44) = $ 522.801

Fair Value of Investment A = 900 - 522.801 = $ 377.199

Investment A has perpetual cash flows with a constant growth rate of 3.33 % per annum and with the first cash flow being $ 60.4

Let the expected return on investment A be R

Therefore, 377.199 = 60.4 / (R - 0.033)

R = (60.4 / 377.199) + 0.033 = 0.193128 ~ 0.1931

NOTE: Please raise a separate query for the solution to the second unrelated question, as one query is restricted to the solution of only one complete question with a maximum of four sub-parts.