Question

PRICING ZERO COUPON BONDS -

(a) Calculate the price of a zero coupon, $1,000 face value, 5-year bond if the appropriate annual discount rate is 12 percent. Calculate your total return if you hold this bond for three years and the discount rate does not change. (INCLUDE FORMULAS USED TO SOLVE PROBLEM IN EXCEL).

EXPECTED RETURN ON T-BILLS -

(b) What is the actual expected return on a US government 12-month, T-bill that is priced at $990, assuming its face value is $1,000? (INCLUDE FORMULAS USED TO SOLVE PROBLEM IN EXCEL).

PRICING BONDS AT A DISCOUNT -

(c) Calculate the price of a 5 percent coupon (annual coupons), $1,000 face value, 5-year bond if the appropriate discount rate is 3 percent. Show your return if you hold this bond for two years and its discount rate doesn't change. (INCLUDE FORMULAS USED TO SOLVE PROBLEM IN EXCEL).

ACTUAL RETURN -

(d) What actual return did you earn if you bought a bond for $1,000, sold it a year later for $1,010, and received a $30 annual coupon the day before you sold it? (INCLUDE FORMULAS USED TO SOLVE PROBLEM IN EXCEL).

Answer 1