Three coupon bonds with a 10% coupon rate all just sell for their face value of...

Three coupon bonds with a 10% coupon rate all just sell for their face value of $1,000. The three bonds will mature in one, two, and five years, respectively. Interest rates on all these bonds are 10% when they are bought, but decline to 5% after they are purchased. Calculate the one-year rates of return on these bonds. What are the initial current yields and the one-year rates of capital gain on these bonds? Which of the three bonds would be the best choice for an investor who has a one-year holding period? Why?

Expert Solution

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = 5% (YTM of bonds = market interest rate)

nper = (Years remaining until maturity with 1 coupon payment each year)

pmt = 1000 * 10% (annual coupon payment = face value * coupon rate)

fv = 1000 (face value receivable on maturity)

1-year rate of return = (price after 1 year - purchase price + annual coupon payment) / purchase price

purchase price = $1,000

annual coupon payment = face value * coupon rate = $1,000 * 10% = $100

current yield = annual coupon payment / bond price

1-year rate of capital gain = (price after 1 year - purchase price) / purchase price

The calculations are below :

For an investor who has a one-year holding period, Bond 3 (5-year bond) is the best choice because it has the highest 1-year return (both total return, and capital gain return).

jeff jeffy answered 1 year ago

A New Corp. wants to issue bonds with a 10% coupon rate, a face value of...

A New Corp. wants to issue bonds with a 10% coupon rate, a face value of $1,000, and 15 years to maturity. It estimates that the bonds will sell for $1,100 and that flotation costs will equal $15 per bond. The common stock currently sells for $30 per share and they can sell additional shares by incurring flotation costs of $3 per share. A dividend was paid yesterday of $4.00 per share and expects the dividend to grow at a...

Bond A has a coupon rate of 10%, with a three-year maturity and a face value...

Bond A has a coupon rate of 10%, with a three-year maturity and a face value of $1,000. If the discount rate now or future is 10%, and you want to buy bond A now, what is the price you have to pay now (P0)? Stock A has an earnings of $5 per share at year 1. The interest rate is 20%, and the return on equity is 25%. If there is no plow-back, what is the book value of...

question 1 Benjamin Corp. bonds pays an annual coupon rate of 10% on a face value...

question 1 Benjamin Corp. bonds pays an annual coupon rate of 10% on a face value of $1,000. If investors' requiredrate of return is now 8% on these bonds, they will be priced at: I. par value, which means market price equals face value II. a premium over par value, which means market price will be higher than face value III. a discount to par value, which means market price will be less than face value IV. can be at...

Johnston, Inc. sold 10-year bonds with a 6% coupon rate to yield 5%. The face value...

Johnston, Inc. sold 10-year bonds with a 6% coupon rate to yield 5%. The face value is $400,000. The bonds pay interest semi-annually. What is the amount of cash proceeds? The cash proceeds are? Please show work on excel and show calculated formulas and use answer by using PV and/or FV table factors

Company XYZ is considering issuing 10-year corporate bonds. The face value is $1,000 and coupon rate...

Company XYZ is considering issuing 10-year corporate bonds. The face value is $1,000 and coupon rate is 5.5% paid semi-annually. If investors’ required return on similar corporate bonds is 8%, how many does XYZ need to issue in order to raise $2,000,000 (assuming no fees or any issuing costs). (10 points)

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 three bonds with 8 percent coupon rates, all selling at face value. The short-term bond...

Consider three bonds with 8 percent coupon rates, all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity of 8 years, and the long-term bond has maturity of 30 years. a) What will happen to the price of each bond if their yields increase to 10 percent? b) What will happen to the price of each bond if their yields decrease to 6 percent? c) What do you conclude about the...

Consider three bonds with 6.6% coupon rates, all selling at face value. The short-term bond has...

Consider three bonds with 6.6% coupon rates, all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has maturity 30 years. a. What will be the price of each bond if their yields increase to 7.6% in 4 Years, 8 Years, 30 Years? (Do not round intermediate calculations. Round your answers to 2 decimal places.) What will be the price of each bond if their...

A 5000 face value bond with a term of 10 years and a coupon rate of...

A 5000 face value bond with a term of 10 years and a coupon rate of 8% payable quarterly is purchased to yield 7.2% convertible quarterly. Find the purchase price.

Rob decided to by a bond with a face value of 1000, coupon rate of 10%...

Rob decided to by a bond with a face value of 1000, coupon rate of 10% which is paid out annually, with a maturity of 6 years. Rob invests the coupon for the first year at 8 percent for a year and sells the bond after receiving the 2nd years coupon is received. At time equals 2, the bonds yield to maturity is 9.5 percent. If Rob earned an annualized 14% return on this what was the purchase price fo...

Question