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Ch. 10 Assignment 4. A coupon bond paying semiannual interest is reported as having an ask price of 117% of its $1,000 par value. If the last interest payment was made one month ago and the...

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Ch. 10 Assignment
4. A coupon bond paying semiannual interest is reported as
having an ask price of 117% of its $1,000 par value. If the last
interest payment was made one month ago and the coupon rate
is 6%, what is the invoice price of the bond? (LO 10-1)
12. You buy an eight-year bond that has a 6% cu
ent yield and a
6% coupon (paid annually). In one year, promised yields to
maturity have risen to 7%. What is your holding-period
eturn? (LO 10-3)
28. A two-year bond with par value $1,000 making annual coupon
payments of $100 is priced at $1,000. What is the yield to
maturity of the bond? What will be the realized compound yield
to maturity if the one-year interest rate next year turns out to
e (a) 8%, (b) 10%, (c) 12%? (LO 10-6)
35. Masters Corp. issues two bonds with 20-year maturities. Both
onds are callable at $1,050. The first bond is issued at a deep
discount with a coupon rate of 4% and a price of $580 to yield
8.4%. The second bond is issued at par value with a coupon
ate of 8.75%. (LO 10-2)
a. What is the yield to maturity of the par bond? Why is it higher
than the yield of the discount bond?
. If you expect rates to fall substantially in the next two years,
which bond would you prefer to hold?
c. In what sense does the discount bond offer “implicit call
protection”?
2. On May 30, 2015, Janice Ke
is considering the newly issued
10-year AAA corporate bonds shown in the following
exhibit: (LO 10-3) Both bonds pay semi-annual coupons.
a. Suppose that market interest rates decline by 100 basis points
(i.e., 1%). Contrast the effect of this decline on the price of each
ond.
. Should Ke
prefer the Colina over the Sentinal bond when rates
are expected to rise or to fall?
5. Bonds of Zello Corporation with a par value of $1,000 sell fo
$960, mature in five years, and have a 7% annual coupon rate
paid semiannually. (LO 10-6)
a. Calculate the:
(1) Cu
ent yield.
(2) Yield to maturity.
(3) Horizon yield (also called realized compound return) for an
investor with a three-year holding period and a reinvestment
ate of 6% over the period. At the end of three years the 7%
coupon bonds with two years remaining will sell to yield
7%.
. Cite one major shortcoming for each of the following fixed-
income yield measures:
(1) Cu
ent yield.
(2) Yield to maturity.
(3) Horizon yield (also called realized compound return).
Answered Same Day Nov 15, 2022

Solution

Priyanka answered on Nov 15 2022
35 Votes
ASSIGNMENT 114408
1. A coupon bond paying semiannual interest is reported as having an ask price of 117% of its $1,000 par value. If the last interest payment was made one month ago and the coupon rate is 6%, what is the invoice price of the bond?
The details given as under:
Par Value = 1000
Coupon Rate = 6% paid semi annually
Ask Price = 117% of par value
     = 1170 [1000*(117%)]
So,
Invoice Price = Clean Price ( quoted price) + Accrued Interest
Accrued Interest need to be calculated for one month as last payment is done one month ago
So Accrued Interest = 1000*6%*1/12 or 1000*3%*1/6
= 5
So Accrued interest is 5.
So Invoice Price = 1170+5
        = 1175
2. You buy an eight-year bond that has a 6% cu
ent yield and a 6% coupon (paid annually). In one year, promised yields to maturity have risen to 7%. What is your holding-period return?
Here, the details are given as under:
Coupon Rate = 6% paid annually
    Cu
ent Yield = 6%
    As the coupon rate and cu
ent yield is same the bond is valued at par.
    So Par Value of Bond is 1000
    Holding Period Return (HPR) = [(End Price- Beginning Price) + Income]/ Beginning Price
    So first we will calculate end price by calculating the present value of future cashflows
    So End price after 7 years will be
    YTM = 7%
    FV = 1000
    CR = 6%
    Coupon Payment (PMT) = CR *FV
             = 60 (1000* 6%)
    PV = FV/(1+r)^n
    PV OF COUPON PAYMENT
     = 60/(1+0.07)^1 + 60/(1+0.07)^2………..60/(1+0.07)^7    
     = 323.28 (56.07+ 52.40….+37.362)
    PV OF FACE VALUE
622.7 (1000/(1+0.07)^7 )
    End Price = PV of Coupon payment Payment +PV of face value
         = 323.28+622.7    
         = 945.98    
So HPR will be = [(945.98-1000)+60]/1000
            0.598%
3. A two-year bond with par value $1,000 making annual coupon payments of $100 is priced at $1,000. What is the yield to maturity of the bond? What will be the realized compound yield to maturity if the one-year interest rate next year turns out to be (a) 8%, (b) 10%, (c) 12%?
Here details are as unde
Par Value =1000
    Coupon Payment = 100
    So coupon rate = 10% (100/1000)
    Face Value = 1000
    So Yield to maturity will be same as coupon rate as the par value and face value are same.
If interest rate is 8%
    So, The coupon amount of 100 will be added
    So total invested amount in first year = 1000+100
     Total invested amount in second year = 100+ 8 (100*8%)                
     Total proceeds after 2 year will be =1208 (1000+100+100+8)    
So realized compound yield to maturity is RCY = {{TR /1000+1...
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