Question
Adam is an investor who intends to use $100,000 to purchase Bond-A (which is a 15-year Zero Coupon Bond with a par value of 1000)
Adam is an investor who intends to use $100,000 to purchase Bond-A (which is a 15-year Zero Coupon Bond with a par value of 1000) when the market yield is 8.24%. He intends to hold the bond for 10 years and to sell that out when the market yield on the Zero Coupon Bonds is 9.25%. (Note: compounding is on an annual basis)
Alternatively, he can invest in a portfolio comprised of the following four bonds, each of which has a par value of $1,000 and pays interest semiannually.
Bond | Coupon Rate (%) | Number of Years to Maturity | Price |
W | 7 | 5 | $884.20 |
X | 8 | 7 | $948.90 |
Y | 9 | 4 | $967.70 |
Z | 0 | 10 | $456.39 |
Answer the below questions.
(1) (10 marks) Calculate the price level at which Adam buys and sells Bond-A
(2) (5 marks) Calculate the annualized holding period yield or total return for the period he has held Bond-A
(3) (10 marks) Calculate the total amount he gets back from Bond-A investment
(4) (25 marks) Use the table below to show the cash flows for the four bonds and the portfolio, and calculate the total return for Bond W if the reinvestment rate is 5%.
Period | Cash flow for Bond W | Cash flow for Bond X | Cash flow for Bond Y | Cash flow for Bond Z | Cash Flow for Portfolio |
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