Question
In: Finance
Suppose that you need $35,000 in three years and that you can finance this with zero-coupon...
Suppose that you need $35,000 in three years and that you can finance this with zero-coupon bonds yielding 5.5% in terms of two years and six years. Imagine that you spend $22,354.86 purchasing a 2 year bond$7451.62 for a six-year bond, and these are each priced yield 5.5%. Suppose also that at the end of two years, no matter what the yield rate i may then be, you sell the remaining bond at a purchase price to yield i, combine the proceeds with $24,881.52 from the redeemed bond, and use the total to buy a one-year zero-coupon bond. Illustrate that this immunizes against interest rate risk by showing that it produces the needed $35,000 three years after your initial bond purchases if i=18% (a high rate) or i= 1% (a low rate).
Solutions
jeff jeffy answered 1 year agoRelated Solutions
Suppose three Treasury zero-coupon bonds with one, two and three years to maturity are trading for...
Suppose three Treasury zero-coupon bonds with one, two and three
years to maturity are trading for $989, $972 and $960 respectively.
All three bonds have $1,000 par value (value paid at maturity).
Construct and draw segment of the Treasury yield curve
corresponding to 1-3 years to maturity. Please provide all
necessary computations and indicate all relevant values on the
graph.
Suppose three Treasury zero-coupon bonds with one, two and three years to maturity are trading for...
Suppose three Treasury zero-coupon bonds with one, two and three
years to maturity are trading for $989, $972 and $960 respectively.
All three bonds have $1,000 par value (value paid at maturity).
Construct and draw segment of the Treasury yield curve
corresponding to 1-3 years to maturity. Please provide all
necessary computations and indicate all relevant values on the
graph.
Suppose you invest in zero coupon bonds and you are looking at a five-year zero-coupon that...
Suppose you invest in zero coupon bonds and you are
looking at a five-year zero-coupon that matures on 2/22/2019, and
which you want to buy on 2/22/2018. It has a face value of $1,000,
and its price is $990.10. If the one-year risk-free rate is 2%,
what is the bond’s YTM?
Suppose you purchase a zero coupon bond with face value $1,000, maturing in 27 years, for...
Suppose you purchase a zero coupon bond with face value $1,000,
maturing in 27 years, for $693.33. What is the implicit interest,
in dollars, in the first year of the bond's life?
Suppose that you purchase a $1,000 zero-coupon bond that matures 3 years from now and is...
Suppose that you purchase a $1,000 zero-coupon bond that matures
3 years from now and is priced to yield 4.5%., Assume interest is
compounded semi-annually.
a. How much will you pay for the bond with exactly 3 years to
maturity?
b. One year later, if interest rates remain the same, what will
be the price of the bond?
c. If you paid $850 for the bond with 3 years to maturity, and
held it until maturity, what will be your...
Suppose that there are three zero-coupon bonds, each with a face value of $100 and no...
Suppose that there are three zero-coupon bonds, each with a face
value of $100 and no default risk. The 1-yr bond has a price of
$94, the 2-yr bond at $90 and the 3-yr bond at $83.
a. What are their spot yields, their yields to maturity?
b. What is the price of a 3-yr default-free bond with a 5%
annual coupon?
c. What is the forward rate on a 1-yr zero coupon bond 2 years
from now?
d. What...
Consider a zero coupon bond with three years to maturity, and is currently priced to yield...
Consider a zero coupon bond with three years to maturity, and is
currently priced to yield 5%. Calculate the following: Macaulay
duration Modified duration Percentage change in price for a 1%
increase in the yield to maturity
This is a zero rates bootstraping question. Suppose there are three coupon bearing treasury bonds. The...
This is a zero rates bootstraping question. Suppose there are
three coupon bearing treasury bonds. The face value of all three
bonds are $100. The first coupon payments for all three bonds will
take place in 6 months. The first bond provides coupon at rate of
2% per annum semiannually and will mature in 1.5 years. The current
price of the first bond is 98.8102. The second bond pays coupon at
the rate of 2% per annum semiannually and will...
Suppose you are going to receive $ 35,000 per year for 18 years at the beginning...
Suppose you are going to receive $ 35,000 per year for 18 years
at the beginning of each year. Compute the present value of the
cash flows if the appropriate interest rate is 14 percent. Round it
two decimal places, and do not include the $ sign, e.g.,
123456.78.
You find a zero coupon bond with a par value of $10,000 and 23 years to...
You find a zero coupon bond with a par value of $10,000 and 23
years to maturity. The yield to maturity on this bond is 4.5
percent. Assume semiannual compounding periods.
What is the price of the bond? (Do not round
intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
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