Bond investment problem, Suppose an investor, desiring to

Bond investment problem

Assignment Help Financial Management

Reference no: EM131026125

Bond investment problem. Suppose an investor, desiring to earn a higher interest than the average paid by bank on savings, purchases two bonds, say bond A and bond B, and intends to sell them immediately after getting the third coupon payment. The characteristics of the two bonds are as follows. Bond A has 20 years to maturity, carries an 8% coupon rate, and its purchase price is $1,105.9403. Bond B has 10 years to maturity, carries an 5% coupon rate, and its purchase price is $859.5285. For simplicity, assume that coupon payments are made annually and face value of both bonds is $1,000. Using this information, please answer the following questions. Carry out your computations and provide answers with precision to the forth decimal place. (a) At the time of purchase, i.e., t0 = 0, what is the yield to maturity for bond A and bond B? Is it the same for both bonds? Should it be the same? (b) At the time of purchase, what is the current yield for both bonds? Is it the same? Should it be the same? (c) For what bond is the current yield a better approximation to the yield to maturity? Why? (d) During the three years while the investor is holding the bonds, the interest rate in market has moved up to 10%. What is the fair value price for both bonds if the investor sells them soon after obtaining the third coupon payment? (e) Assume the investor sells the bonds at the fair value prices you have found in (d). What are the net returns on each bond? (f) Using the numbers for net returns, compute the rate of return on each bond. Annualize the rates of return. (g) Carefully explain the difference or similarity in rates of returns on the two bonds. [Hint: Your explanation should incorporate life to maturity for both bonds.]

Reference no: EM131026125

Questions Cloud

How many electrons in a ground-state krypton : How many electrons in a ground-state krypton atom are in orbitals labeled by ml = 1

Determine the motor speed and efficiency : The dc supply voltage is VT = 200 V, the armature resistance is RA = 0.085 Ω, the field resistance is RF = 10 Ω, and the adjustable resistance is Radj = 2.5 Ω. At a speed of 1200 rpm, the rotational loss is Prot = 1000 W.

How to proceed to show all inng form a normal subgroup : For the first part, I can see that we need to show that f(g(x)) = g(f(x)) for x in G and use f(x)=x as the identity in the group, but I' not certain how to proceed to show all innG form a normal subgroup?

Which of the following reactions have a positive srxn : Which of the following reactions have a positive Srxn? Mark all that apply. A+B-->2C A+2B->C

Bond investment problem : Suppose an investor, desiring to earn a higher interest than the average paid by bank on savings, purchases two bonds, say bond A and bond B, and intends to sell them immediately after getting the third coupon payment. The characteristics of the two ..

The value of k : A vessel at 1000 K contains CO2 with a pressure of 0.5 atm. Some of the CO2 is converted into CO on the addition of graphite. If the total pressure at equilibrium is 0.8 atm, the value of K

What is the value of foreign earnings of us residents : What is the value of foreign earnings of U.S. residents and firms in 1999? What is the value of depreciation in the U.S. economy in 1999? What is the value of National Income in the U.S. economy in 1999

Calculating the size of the money multiplier : Assume a financial system has a monetary base (MB) of $25 million. The required reserves ratio is 10 percent, and no leakages are in the system. a. What is the size of the money multiplier (m)? b. What will be the system's money supply?

How long will you wait from now : You expect to receive $15,500 at graduation in three years. You plan on investing it at 12 percent until you have $86,000. How long will you wait from now? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g...

User Account

All Pages