Assume you have a one-year investment horizon and are trying to
choose among three bonds. All...
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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 8.6% coupon rate and pays the$86 coupon once per year. The third has a 10.6% coupon rate andpays the $106 coupon once per year.
a.
If all three bonds are now priced to yield 8.6% to maturity,what are their prices? (Do not roundintermediate calculations.Round your answers to 2decimal places.)
Zero
8.6% Coupon
10.6% Coupon
  Current prices
$Â Â Â Â Â Â Â Â
$Â Â Â Â
$Â Â Â Â Â
b-1.
If you expect their yields to maturity to be 8.6% at thebeginning of next year, what will their prices be then? (Donot round intermediate calculations.Round youranswers to 2 decimal places.)
Zero
8.6% Coupon
10.6% Coupon
  Price one year from now
$Â Â Â Â Â
$Â Â Â Â Â
$Â Â Â Â Â
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.)
Zero
8.6% Coupon
10.6% Coupon
  Rate of return
% Â Â Â Â Â
% Â Â Â Â Â
% Â Â Â Â Â
Answer & Explanation
Solved by verified expert
3.6 Ratings (594 Votes)
a]
Current
price of zero coupon bond = 1000/1.086^10 =Â Â
$Â Â Â Â Â Â Â Â Â Â Â Â
438.23
Current price of the second bond =
$Â Â Â Â Â Â Â Â Â
1,000.00
[As the coupon rate and the market
rate are tge same the price of the
second bond will be equal to the
face value]
Current
price of the third bond =
1000/1.086^10+106*(1.086^10-1)/(0.086*1.086^10) =
$Â Â Â Â Â Â Â Â Â
1,130.64
b-1]
Price of the zero coupon bond = 1000/1.086^9 =
$Â Â Â Â Â Â Â Â Â Â Â Â
475.92
Price of the second bond =
$Â Â Â Â Â Â Â Â Â
1,000.00
Current
price of the third bond =
1000/1.086^9+106*(1.086^9-1)/(0.086*1.086^9) =
$Â Â Â Â Â Â Â Â Â
1,121.88
b-2]
Rate of return of zero coupon bond = 475.92/438.23-1 =
8.60%
Rate of return of the second bond = (86+1000-1000)/1000 =
8.60%
Rate of
return of the second bond = (106+1121.88-1130.64)/1130.64 =
8.60%
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