Reference no: EM131025513
Bond investment problem. Suppose an investor, desiring to earn a higher interest than the average paid by bank on savings, purchases two bonds, say bond A and bond B, and intends to sell them immediately after getting the third coupon payment. The characteristics of the two bonds are as follows. Bond A has 20 years to maturity, carries an 8% coupon rate, and its purchase price is $1,105.9403. Bond B has 10 years to maturity, carries an 5% coupon rate, and its purchase price is $859.5285. For simplicity, assume that coupon payments are made annually and face value of both bonds is $1,000. Using this information, please answer the following questions. Carry out your computations and provide answers with precision to the forth decimal place.
(a) At the time of purchase, i.e., t0 = 0, what is the yield to maturity for bond A and bond B? Is it the same for both bonds? Should it be the same?
(b) At the time of purchase, what is the current yield for both bonds? Is it the same? Should it be the same?
(c) For what bond is the current yield a better approximation to the yield to maturity? Why?
(d) During the three years while the investor is holding the bonds, the interest rate in market has moved up to 10%. What is the fair value price for both bonds if the investor sells them soon after obtaining the third coupon payment?
(e) Assume the investor sells the bonds at the fair value prices you have found in (d). What are the net returns on each bond?
(f) Using the numbers for net returns, compute the rate of return on each bond. Annualize the rates of return.
(g) Carefully explain the difference or similarity in rates of returns on the two bonds. [Hint: Your explanation should incorporate life to maturity for both bonds.]
|
Credit risk-market risk and liquidity risk
: The different risks that have to be considered when conducting an analysis are: credit risk (or defaulting on a debt,) liquidity risk (or not being able to move the asset fast enough when needed,) market risk (or lower demand leading to loss of produ..
|
|
An exclusive golf club was denied for the second time
: You are having a lunch meeting with a loyal and very good customer. Over lunch you happen to mention that your application to an exclusive golf club was denied for the second time. Your customer responds, "Hey, why didn’t you tell me? My family has b..
|
|
Dividend payout ratio and a constant debt–equity ratio
: The most recent financial statements for Mc Govney Co. are shown here: Income Statement Balance Sheet Sales $ 38,200 Current assets $ 21,800 Long-term debt $ 51,500 Costs 29,100 Fixed assets 76,000 Equity 46,300 Taxable income $ 9,100 Total $ 97,800 ..
|
|
Sales and the dividend payout ratio is constant
: Consider the following income statement for the Heir Jordan Corporation: HEIR JORDAN CORPORATION Income Statement Sales $ 46,800 Costs 36,200 Taxable income $ 10,600 Taxes (35%) 3,710 Net income $ 6,890 Dividends $ 3,400 Addition to retained earnings..
|
|
Current yield better approximation to the yield to maturity
: Bond investment problem. Suppose an investor, desiring to earn a higher interest than the average paid by bank on savings, purchases two bonds, say bond A and bond B, and intends to sell them immediately after getting the third coupon payment. For wh..
|
|
What is the new price of the bond using duration
: You find a bond with 15 years until maturity that has a coupon rate of 8.0 percent and a yield to maturity of 7.1 percent. Suppose the yield to maturity on the bond increases by .25 percent. What is the new price of the bond using duration? What is t..
|
|
Determine the expected profit or loss
: Kurnick Co. expects that the pound will depreciate from $1.70 to $1.68 in one year. It has no money to invest, but it could borrow money to invest. It has been approved by a bank to borrow either 1 million dollars or 1 million pounds for one year. De..
|
|
Vehicles expected life of three years as delivery vehicle
: You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $23,500 to purchase and which will have OCF of –$3,100 annually throughout the vehicle’s expected life of three years as..
|
|
Internal rate of return and modified internal rate of return
: Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company's geologist, has just finished his analysis of the mine site. Construct a spreadhseet to calculate the payback period, internal rat..
|