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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

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

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