Risk-free zero coupon bond-what is the price she sold bond

Assignment Help Financial Management

Reference no: EM131869787

A risk-free zero coupon bond pays $1,000 at the end of six years.

(a) The risk-free rate is currently 10% effective annual. What should the current price of the bond be?

(b) Suppose the bond currently costs $500. Describe an arbitrage to take advantage of any discrepancy you see. What will you buy? What will you sell? What are your cashflows today and in the future? For the remaining sub-questions, assume that there are no arbitrage opportunities.

(c) Joan buys the bond today after arbitrage by market participants has restored its price to what it should be. She intends to hold it till maturity, and to receive the payment of $1,000. What will her HPR be? What will her annualized HPR (AHPR) be?

(d) So she’s bought the bond, and holds it for four years. Then, without warning, her son decides to go to medical school and she has to sell all her investments to pay the fees.

i. Suppose the risk-free rate on the date she sells the bond is 6% effective annual. What is the price she sold the bond for? What was the HPR she made over the four years? What was the AHPR she made?

ii. Suppose instead that the risk-free rate on the date she sells the bond is 10% effective annual. What is the price she sold the bond for? What was the HPR she made? What was the AHPR she made?

iii. Evaluate the truth of this statement: “At the time Joan bought the bond, the interest rate in the market was 10%, and the bond was priced so that we will make 10% per year on it. We already know that the payment the bond makes is risk-free. Therefore Joan is guaranteed to make 10% on her investment in this bond.” Under what conditions is this statement true? Under what conditions can this statement be false?

Reference no: EM131869787

Questions Cloud

Substantial trade transactions between turkey and the us : Assume that you are a required to analyze foreign exchange rates for a large US MNC. There is substantial trade transactions between Turkey and the US.

Financial market consisting of two risky assets : We have a financial market consisting of two risky assets. find the possible values of the correlation ?12.

Options considered in the case by management : Using Table 1 in the case duplicate the sensitivity analysis of the production points for the three options considered in the case by management:

Stock sell for in one year to meet investors expectations : What must stock sell for in one year to meet investors expectations of 15% after-tax return if dividends are taxed at 28% and there are no capital gains taxes?

Risk-free zero coupon bond-what is the price she sold bond : A risk-free zero coupon bond pays $1,000 at the end of six years. What is the price she sold the bond for? What was the HPR she made over the four years?

Full-scale production of the appliance-control device : Household Energy Products (HEP) wants to decide whether it should proceed with full-scale production of the appliance-control device.

Normally pays an annual dividend : JBK, Inc., normally pays an annual dividend. The last such dividend paid was $2.00, all future dividends are expected to grow at 6 percent,

Finance plant expansion : DiPitro’s Paint and Wallpaper, Inc., needs to raise $1.06 million to finance plant expansion.

Dividend are anticipated to maintain six percent growth rate : The dividends are anticipated to maintain a 6 percent growth rate forever. If the stock currently sells for $ 43 per share, the required return is ______percent

User Account

All Pages