Question

In: Finance

2. a. For the Zero Coupon Bond 2 above, what will be your annual compound yield...

2. a. For the Zero Coupon Bond 2 above, what will be your annual compound yield for your 5 year holding period if the bond is held until maturity. (Hint: PV is the price you calculated for Bond 2 and FV is the bond’s maturity value of $1,000 and n is the 5 year holding period; solving for i) (see formulas below). Hint Recall: Annual Compound Yield = {[FV / PV] ^ 1/n} - 1 or In other words {[What you have at the end of 5 Years / What You Paid] ^1/n } - 1 n = your 5-year holding period. Annual Compound Yield for Bond 2 at End of Year 5 __________________

b. Suppose for the Coupon Bond 1 above, rates go down to 2% after you purchase the bond for the life of the bond. Thus, you have to invest each of your $40 coupon payments at a 2% rate, and hold the bond to maturity, receiving your $1,000 maturity value at the end of year 5. What will be your annual compound yield? Hint: Recall FV of Bond Coupons Reinvested for 5 years = Coupon Payment (FVIFA 2%, 5) ACY = { [(FV of Coupons +Maturity Value) / (Price of Bond)] ^1/n } - 1, where n = 5 years Annual Compound Yield for Bond 1 at the End of Year 5 ____________

c. Explain why you received your desired annual compound return for the 5 year holding period for Bond 2 in a., but didn’t receive your desired Annual Compound Return for Bond 1 for your 5 year holding period in b.?

Solutions

Expert Solution


Related Solutions

A 12.25-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield)...
A 12.25-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 139.2 and modified duration of 11.34 years. A 40-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration—-12.30 years—but considerably higher convexity of 272.9. a. Suppose the yield to maturity on both bonds increases to 9%. What will be the actual percentage capital loss on each bond? What...
A 12.75-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield)...
A 12.75-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 150.3 and modified duration of 11.81 years. A 30-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical duration—11.79 years—but considerably higher convexity of 231.2. Suppose the yield to maturity on both bonds increases to 9%. What will be the actual percentage capital loss on each bond? What percentage capital...
A 13.05-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield)...
A 13.05-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 120.2 and modified duration of 11.91 years. A 40-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration—-11.65 years—-but considerably higher convexity of 280.2. a. Suppose the yield to maturity on both bonds increases to 9%. What will be the actual percentage capital loss on each bond? What...
A 14.55-year maturity zero-coupon bond selling at a yield to maturity of 7% (effective annual yield)...
A 14.55-year maturity zero-coupon bond selling at a yield to maturity of 7% (effective annual yield) has convexity of 197.7 and modified duration of 13.60 years. A 40-year maturity 5% coupon bond making annual coupon payments also selling at a yield to maturity of 7% has nearly identical modified duration—-13.96 years—but considerably higher convexity of 338.8. a. Suppose the yield to maturity on both bonds increases to 8%. What will be the actual percentage capital loss on each bond? What...
A 13.05-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield)...
A 13.05-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 157.2 and modified duration of 12.08 years. A 40-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration—-12.30 years—-but considerably higher convexity of 272.9. a. Suppose the yield to maturity on both bonds increases to 9%. What will be the actual percentage capital loss on each bond? What...
​Zero-coupon bond. Wesley Company will issue a zero-coupon bond this coming month. The projected bond yield...
​Zero-coupon bond. Wesley Company will issue a zero-coupon bond this coming month. The projected bond yield is 10%. If the par value is ​$5,000​, what is the​ bond's price using a semiannual convention if a. the maturity is 15 ​years? b. the maturity is 35 ​years? c. the maturity is 50 ​years? d. the maturity is 100 ​years?
​Zero-coupon bond. Wesley Company will issue a zero-coupon bond this coming month. The projected bond yield...
​Zero-coupon bond. Wesley Company will issue a zero-coupon bond this coming month. The projected bond yield is 6 %. If the par value LOADING... is ​$1,000​, what is the​ bond's price using a semiannual convention if a. the maturity is 20 ​years? b. the maturity is 30 ​years? c. the maturity is 50 ​years? d. the maturity is 90 ​years?
Zero-coupon bond. Wesley Company will issue a zero-coupon bond this coming month. The projected bond yield...
Zero-coupon bond. Wesley Company will issue a zero-coupon bond this coming month. The projected bond yield is 8%. If the par value is ​$100,000, what is the​ bond's price using a semiannual convention if a. the maturity is 10 ​years? b.the maturity is 40 ​years? c.the maturity is 50 ​years? d.the maturity is 80 ​years?
What is the coupon rate of an annual coupon bond that has a yield to maturity...
What is the coupon rate of an annual coupon bond that has a yield to maturity of 5.5%, a current price of $949.81, a par value of $1,000 and matures in 15 years? 6.33% 4.70% 3.07% 5.00%
What is the percentage change in price for a zero coupon bond if the yield changes...
What is the percentage change in price for a zero coupon bond if the yield changes from 5% to 8%? The bond has a face value of $1,000 and it matures in 12 years. Use the price determined from the first yield, 5%, as the base in the percentage calculation.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT