Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You consider issuing a 4-year bond which, unlike normal bonds, does not pay any face value at maturity. The bond only pays coupons that

image text in transcribed 


You consider issuing a 4-year bond which, unlike normal bonds, does not pay any face value at maturity. The bond only pays coupons that grow at a rate of 5% each year. For instance, the first coupon, paid at the end of year one, is $1,000 (1 + 0.05), the second is $1,000 (1+0.05), and so on. The current interest rate is 5%, and the yield curve is flat. 1. What is the present value of the bond? 2. What is the duration of the bond? 3. You sold $5 mil. worth of bonds. You now want to invest the proceeds you raise in two assets: a 12-month Treasury Bill (A1) and a 4-year zero coupon bond (A2). How much should you invest in each asset to avoid any duration mismatch?

Step by Step Solution

3.41 Rating (154 Votes )

There are 3 Steps involved in it

Step: 1

To calculate the present value of the bond we need to find the present value of each coupon payment and sum them up The coupon payments are growing at ... 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

Fundamentals of Corporate Finance

Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim

6th Canadian edition

1259024962, 978-1259024962

More Books

Students also viewed these Finance questions