Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Hello! I am having problems understanding some of this, can someone help me and answer the questions for me please 1. YTM A company has

Hello! I am having problems understanding some of this, can someone help me and answer the questions for me please

image text in transcribed 1. YTM A company has 7 percent coupon bonds on the market with 9 years left to maturity. Coupons are paid annually. If the bond currently sells for $1,038.50, what is its yield to maturity? What if the current price is only $980.30? 2. Bond Pricing A company issued 20-year bonds one year ago at a coupon rate of 6.1%. Coupons are semi-annually paid. If YTM on these bonds is 5.3%, what is the current bond value? What if the coupon is paid annually? Hint: Use PV function. 3. Nominal vs Real Returns A. An investment offers a total return of 14% over the coming year. You believe the real return on this investment will be only 10%. What do you believe the inflation rate will be over the next year? B. If inflation rate in the next year is 3% and if you want the real return of 8%, what is the nominal return that you require from an investment? Hint: Fisher Effect Equation. 4. Interest Rate Risk Both Bonds A and B are priced at par since their YTMs are the same as their coupon rate of 7%. What happens to their prices if interest rate in the market rises by 2%? What if the interest rate falls by 2%? Compute the prices in $ and also the percentage change. Bond A: Bond B: Coupon rate 7% Coupon rate 7% Settlement date 1/1/2000 Settlement date 1/1/2000 Maturity date 1/1/2003 Maturity date 1/1/2020 Redemption (% of par) 100 Redemption (% of par) 100 # of coupons per year 2 # of coupons per year 2 YTM 7% 5. Zero Coupon Bonds Your company needs to raise $30 million by issuing 20-year bonds. Assume YTM is 7.5% and you are evaluating two alternatives: A. 7.5% semiannual coupon bond, or B. a zero coupon bond. Amount needed $ 30,000,000 Years to maturity 20 Required return = Coupon rate 7.5% Face value $ 1,000 Tax rate 35% (1) How many of coupon bonds would you need to issue to raise the whole amount? How many of zeroes would you need to issue? (2) At maturity, what will your company's repayment be if you issue the coupon bond? What if you issue the zeroes? 6. Holding Period Return You buy a 7% annual coupon bond for $875 today. The bond has 10 years till maturity. A. What rate of return do you 'expect' to earn on your bond investment? B. Two years from now, the YTM on your bond has declined by 1% due to credit rating improvement or market interest rate changes. If you decide to sell the bond, what price will your bond sell for? What is the holding period return on your investment? Compare this HPR with the YTM from part A

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting Information Systems

Authors: Robert Hurt

2nd Edition

78111056, 978-0078111051

More Books

Students also viewed these Accounting questions

Question

Technology

Answered: 1 week ago

Question

Population

Answered: 1 week ago

Question

The feeling of boredom.

Answered: 1 week ago