What will be the holding period rate of return for each bond

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1. Assume that you are trying to choose which of 3 bonds to buy:

? A zero coupon bond

? A 5% coupon bond

? An 8% coupon bond

Each has a face value of $1,000. They all mature in 10 years, have the same default risk and pay any coupons annually. There are no other special provisions.

a. If the current market rate of interest is 4%, what are the prices of the three bonds?

b. If your holding period is one year only, what will be the holding period rate of return for each bond?

2. Suppose you are Investing money in an RESP (Registered Educational Savings Plan) to meet your child’s post-secondary schooling expenses. You expect you will have to pay out $20,000 per year for 4 years starting 9 years from now. We will just consider the first year’s obligation of $2,000. You have available the three bonds described in Question 2 above.

a. Calculate the current price and duration of each bond.

b. Calculate the shares of Bonds 1 and 3 in an optimal immunized portfolio.

Reference no: EM131928594

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