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( LO 6 . 2 , 6 . 3 , 6 . 5 ) The Slice & Dice Investment Co . needs some help understanding
LO The Slice & Dice Investment Co needs some help understanding the intricacies of bond pricing. It
has observed the following prices for zero coupon bonds that have no risk of default:
a How much should Slice & Dice be willing to pay for a threeyear bond that pays a percent coupon, assuming annual
coupon payments start one year from now?
b What is the yield to maturity of the threeyear coupon bond?
c Suppose Slice & Dice purchases this coupon bond and then unbundles" it into its four component cash flows: three
coupon payments and the par value amount. At what prices can Slice & Dice resell each of the first three cash flows
the coupon payments today?
d The remaining cash flow the face value amount is a "synthetic" threeyear, zero coupon bond. How much must this
"strip bond" be sold for if Slice & Dice is to break even on the investment?
e What is the yield to maturity on the synthetic threeyear, zero coupon bond?
f Why are the answers for parts b and e different?The Slice & Dice Investment Co needs some help understanding the intricacies of bond pricing. It has observed the following prices for zero coupon bonds that have no risk of default:
Maturity
Price per $ Face Value
year
$
years
years
How much should Slice & Dice be willing to pay for a threeyear bond that pays a percent coupon, assuming annual coupon payments start one year from now?
What is the yield to maturity of the threeyear coupon bond?
Suppose Slice & Dice purchases this coupon bond and then unbundles it into its four component cash flows: three coupon payments and the par value amount. At what prices can Slice & Dice resell each of the first three cash flows the coupon payments today?
The remaining cash flow the face value amount is a synthetic threeyear, zero coupon bond. How much must this strip bond be sold for if Slice & Dice is to break even on the investment?
What is the yield to maturity on the synthetic threeyear, zero coupon bond?
Why are the answers for parts b and e different
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