Two 30-year maturity mortgage-backed bonds are issued. The first bond has a par value of $10,000 and promises to pay a 10.5 percent annual coupon, while the second is a zero coupon bond that promises to pay $10,000 (par) after 30 years, with interest accruing at 10.0 percent. At issue, bond market investors require a 12.0 percent interest rate on both bonds. Required: a. What is the initial price on each bond? b. Now assume that both bonds promise interest at 10.5 percent, compounded semiannually. What will be the initial price for each bond? c. If market interest rates fall to 9.5 percent at the end of the fifth year, what will be the value of each bond, assuming annual payments as in (a) (state both as a percentage of par value and actual dollar value)?

Two 30-year maturity mortgage-backed bonds are issued. The first bond has a par value of $10,000 and promises to pay a 10.5 percent annual coupon, while the second is a zero coupon bond that promises to pay $10,000 (par) after 30 years, with interest accruing at 10.0 percent. At issue, bond market investors require a 12.0 percent interest rate on both bonds. Required: a. What is the initial price on each bond? b. Now assume that both bonds promise interest at 10.5 percent, compounded semiannually. What will be the initial price for each bond? c. If market interest rates fall to 9.5 percent at the end of the fifth year, what will be the value of each bond, assuming annual payments as in (a) (state both as a percentage of par value and actual dollar value)?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation) Fingen's 16-year,1000 $ par value bonds pay 13 percent interest annually. The market price of the bonds is $1070 and the market's required yield to maturity on a comparable-risk bond is 14 percent. a. Compute the bond's yield to maturity. b. Determine the value of the bond to you, given your required rate of return. c. Should you purchase the bond? a. What is your yield to maturity on the Fingen bonds given the market price of the bonds? % (Round to two decimal places.)
(Yield to maturity) Fitzgerald's 35-year bonds pay 8 percent interest annually on a $1,000 par value. If the bonds sell at $945, what is the bond's yield to maturity? What would be the yield to maturity if the bonds paid interest semiannually? Explain the difference. a. The bond's yield to maturity if the bond pays interest annually is %. (Round to three decimal places.)
An investor must choose between two bonds: Bond A pays $102 annual interest and has a market value of $890. It has 10 years to maturity. Bond B pays $88 annual interest and has a market value of $800. It has five years to maturity. Assume the par value of the bonds is $1,000. a. Compute the current yield on both bonds. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) b. Which bond should she select based on your answers to part a? multiple choice 1 Bond A Bond B c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond A is 12.10 percent. What is the approximate yield to maturity on Bond B? The exact yield to maturity? (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as…
The Omani Company has two bond issues outstanding. Both bonds pay OMR (1000) annual interest plus OMR (10000) face value at maturity. Bond L has a maturity of 20 years, sell after three years issued, and Bond S has a maturity of 1 year. What will be the value of each of these bonds when the going rate of market interest is 12%? what can you conclude from the results of the above questions regarding the bond risks?
Q1) He Omani Company has two bond issues outstanding. Both bonds pay OMR (100) annual interest plus OMR (1000) face value at maturity. Bond L has a maturity of 15 years, sell after three years issued, and Bond S has a maturity of 1 year. A. What will be the value of each of these bonds when the going rate of market interest is 12%? B. what can you conclude from the results of the above questions regarding the bond risks?
Related to Checkpoint 9.2) (Yield to maturity) The Saleemi Corporation's $1,000 bonds pay 8 percent interest annually and have 15 years until maturity. You can purchase the bond for $1,075. a. What is the yield to maturity on this bond? b. Should you purchase the bond if the yield to maturity on a comparable-risk bond is 6 percent? Question content area bottom Part 1 a. The yield to maturity on the Saleemi bonds is enter your response here%. (Round to two decimal places.) Part 2 b. You ▼ should should not purchase the bonds because your yield to maturity on the Saleemi bonds is ▼ greater less than the one on a comparable risk bond. (Select from the drop-down menus.)
Consider two bonds. Bond X has a face value of ₱100,000 and five years remaining to maturity. Bond Y has a face value of ₱100,000 and ten years remaining to maturity. Both bonds have the same stated rate of 12%. Which bond has the greatest interest rate risk? Provide a computation
Calculate the fair present values of the following bonds, all of which pay interest semiannually, have a face value of $1,000, have 12 years remaining to maturity, and have a required rate of return of 11.5 percent. a. The bond has a 7.8 percent coupon rate. (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g. 32.16)) b. The bond has a 9.8 percent coupon rate. (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g.. 32.16)) c. The bond has a 11.5 percent coupon rate. (Do not round intermediate calculations.) a. Fair present value b. Fair present value c. Fair present value
Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $750, calculate the interest rate that the bond would yield to a bond buyer. Show all work.
B. Directions: Compute for the following given statement and justify your answer. 1. Consider two bonds. Bond A has a face value of P100,000 and a stated rate of 12%. Bond B has a face value of P100,000 and a stated rate of 8%. Both bonds have the same maturity. Which bond has the greatest interest rate risk? 2. Consider two bonds. Bond X has a face value of P100,000 and five years remaining to maturity. Bond Y has a face value of P100,000 and ten years remaining to maturity. Both bonds have the same stated rate of 12%. Which bond has the greatest interest rate risk?
(Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation) Fingen's 19-year $1,000 par value bonds pay 8 percent interest annually. The market price of the bonds is $880 and the marker's required yield to maturity on a comparable-risk bond is 11 percent.a. Compute the bond's yield to maturity.b. Determine the value of the bond to you, given your required rate of retumc. Should you purchase the bond?
Calculate the fair present values of the following bonds, all of which pay interest semiannually, have a face value of $1,000, have 12 years remaining to maturity, and have a required rate of return of 10 percent. The bond has a 6 percent coupon rate. The bond has a 8 percent coupon rate. The bond has a 10 percent coupon rate. What do your answers to parts (a) through (c) say about the relation between coupon rates and present values?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS