Scribd Logo
Upload

Welcome to Scribd!

  • 99 views

    FN2201solution ch10

    Uploaded by

    Seong Hye An
    If both bonds had a required return of 8%, what would the bonds' prices be? a 2-year $1,000 par zero-coupon bond is currently priced at $819.00. A 7-year, $1,000 par bond has an 8% annual coupon and is currently yielding 7.5%.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd

    FN2201solution ch10

    Uploaded by

    Seong Hye An
    99 views2 pages
    If both bonds had a required return of 8%, what would the bonds' prices be? a 2-year $1,000 par zero-coupon bond is currently priced at $819.00. A 7-year, $1,000 par bond has an 8% annual coupon and is currently yielding 7.5%.

    Original Title

    FN2201solution_ch10

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    DOC, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    If both bonds had a required return of 8%, what would the bonds' prices be? a 2-year $1,000 par zero-coupon bond is currently priced at $819.00. A 7-year, $1,000 par bond has an 8% annual coupon and is currently yielding 7.5%.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    99 views2 pages

    FN2201solution ch10

    Uploaded by

    Seong Hye An
    If both bonds had a required return of 8%, what would the bonds' prices be? a 2-year $1,000 par zero-coupon bond is currently priced at $819.00. A 7-year, $1,000 par bond has an 8% annual coupon and is currently yielding 7.5%.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 2

    FIM solutions for chapter 10 3.

    Consider the two bonds described below: Maturity Coupon Rate (Paid semiannually) Par Value Bond A Bond B 15 yrs 20 yrs 10% 6% $1,000 $1,000

    (a)If both bonds had a required return of 8%, what would the bonds prices be? (b)Describe what it means if a bond sells at a discount, a premium, and at its face amount (par value). Are these two bonds selling at a discount, premium, or par? (c)If the required return on the two bonds rose to 10%, what would the bonds prices be? Problem solution for end of chapter and study guide 1. $924.18 2. $148.64 3. (a) Bond A = $1,172.92 Bond B = $802.07 (b) Bond A is selling at a premium Bond B is selling at a discount (c) Bond A = $1,000 Bond B = $656.82 4. A 2-year $1,000 par zero-coupon bond is currently priced at $819.00. A 2-year $1,000 annuity is currently priced at $1,712.52. If you want to invest $10,000 in one of the two securities, which is a better buy? You can assume (1)the pure expectations theory of interest rates holds, (2)neither bond has any default risk, maturity premium, or liquidity premium, and (3)you can purchase partial bonds. Solution: With PV = $819, FV = $1,000, PMT = 0 and N = 2, the yield to maturity on the twoyear zero-coupon bonds is 10.5% for the two-year annuities, PV = $1,712.52, PMT = 0, FV = $2,000 and N = 2 gives a yield to maturity of 8.07%. The zero-coupon bonds are the better buy. 7. If the municipal bond rate is 4.25% and the corporate bond rate is 6.25%, what is the marginal tax rate assuming investors are indifferent between the two bonds? Solution: The equivalent tax-free rate = taxable interest rate * (1 marginal tax rate). In this case, 0.0425 = 0.0625 * (1 X),orX = 32%. 13. A 7-year, $1,000 par bond has an 8% annual coupon and is currently yielding 7.5%. The bond can be called in 2 years at a call price of $1,010. What is the bond yielding, assuming it will be called (known as the yield to call)? Solution: The current price of the bond is computed as follows: PMT = 80; N = 7; FV = 1000; I = 7.5 Compute PV; PV = 1,026.48 Using this, the yield to call is calculated as follows: PMT = 80; N = 2; FV = 1010; PV = 1,026.48 Compute I; I = 7.018%

    16. Your company owns the following bonds: Bond A B C Market Value $13 million $ 18 million $ 20 million Duration 2 4 3

    If general interest rates rise from 8% to 8.5%, what is the approximate change in the value of the portfolio? Solution: Portfolio duration = 2 (13/51) + 4 (18/51) + 3 (20/51) = 3.09 Value = Duration ( i/(1 + i) Original Value Value = Duration (0.085 0.08)/(1 + 0.08) Original Value Value = 3.09 (0.005/1.08) $51 million = $729,583

    You might also like