A bonds are traded in the market at 10% YTM at all maturities, and you buy an
Question:
A bonds are traded in the market at 10% YTM at all maturities, and you buy an A grade 10 year bond with a 9% coupon, a face value of $1,000 and an annual coupon payment. Let's say immediately after you buy the bond, the yield on such bonds drops to 8% at all maturities and stays there until you sell the bond on your four-year horizon date.
How much did you pay for a 10-year bond with a 9% coupon?
Show the coupons you bought on the bond and their value on the horizon date you reinvested in a flow matrix.
What is the price of the original 10-year bond in your horizon date?
What is your horizon date value and total return?
13. Given a 10-year, semi-annual, $1,000 face value and 10% coupon bond currently trading at par, calculate the total return for an investor with a 5-year horizon date under the following interest rate scenarios:
The yield on such bonds stays at 10% at all maturities until the investor sells the bond on the horizon date.
Immediately after the investor buys the bond, the yield on such bonds drops to 8% at all maturities and remains at that level until the investor sells the bond at maturity.
Immediately after the investor buys the bond, the yield on such bonds rises to 12% at all maturities and remains at that level until the investor sells the bond at maturity.
Interprets the relationship between total return and interest rates.
14. Given the following spot rates for zero coupon bonds with maturities of 1 to 4 years:
Year Spot Ratio
1 %8.0
2 %8,5
3 %9.0
4 %9,5
A. What is the equilibrium price of a four-year, 9% coupon bond that pays $100 principal and annual coupon at maturity?
B. If the market prices the four-year bond to yield 10%, what is the market price of the bond?
C. What would arbitrageurs do if they gave you the prices you set in (a) and (b)? What effect will their actions have on the market price?
D. What do arbitrageurs do if the market price exceeds the equilibrium price? What effect will their actions have on the market price?
15. Bond X is a one-year zero with a face value of 1,000 and trading at $945, and Bond Y is a two-year zero with a face value of 1,000 at 870.
A. Determine the algebraically implied transmission ratio f 11 .
B. Explain how the rate of progress can be achieved with a locking strategy.
16. Suppose an investor plans to buy a stock currently priced at $200 and is expected to pay an annual dividend of $20 over the next three years and sell it at $100 at the end of the third year. Assuming the investor can reinvest 10% of his dividends, what is the investor's expected total return on the stock?
17. Suppose a well-established company is expected to have a steady 5% growth rate in its dividends for a very long time. What is the value of the company's stock if the current dividend is $1 per share and the discount rate that investors demand for the stock is 10%? What would the stock be worth if it was expected to grow 7% for three years and then 5%?
Fundamentals of Investing
ISBN: 978-0133075359
12th edition
Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk