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Assume you have a one-year investment horizon and are trying to choose among three bonds. All...

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Finance

Assume you have a one-year investment horizon and are trying tochoose among three bonds. All have the same degree of default riskand mature in 10 years. The first is a zero-coupon bond that pays$1,000 at maturity. The second has an 8.9% coupon rate and pays the$89 coupon once per year. The third has a 10.9% coupon rate andpays the $109 coupon once per year.

a.

If all three bonds are now priced to yield 8.9% to maturity,what are their prices? (Do not roundintermediate calculations. Round your answers to 2decimal places.)

Zero8.9% Coupon10.9% Coupon
  Current prices$        $     $      
b-1.

If you expect their yields to maturity to be 8.9% at thebeginning of next year, what will their prices be then? (Donot round intermediate calculations. Round youranswers to 2 decimal places.)

Zero8.9% Coupon10.9% Coupon
  Price one year from now$      $      $      
b-2.

What is your rate of return on each bond during the one-yearholding period? (Do not round intermediatecalculations.Round your answers to 2 decimalplaces.)

Zero8.9% Coupon10.9% Coupon
  Rate of return%      %      %      

Answer & Explanation Solved by verified expert
3.9 Ratings (718 Votes)
Price of Bond Present Value of future cash flowsFirst Bond Zerocoupon with maturity payment of 1000RateYield to maturity890NperNumber of years to maturity10FvPayment at maturity1000PVCurrent Price42631Using PV function of excelwith Rate89 Nper10Fv1000Second Bond 89 couponRateYield to maturity890NperNumber of years to maturity10PmtAnnual Coupon    See Answer
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