A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate, a...

Transcribed Image Text:

A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate, a 7 percent promised YTM, and 10 years to maturity. What is the bond's duration? 2. 456 Solution: 7.35 years YIELD CURVE FOR ZERO COUPON BONDS RATED AA Maturity 1 2 3 6 YTM year 8.00% year 8.11% year 8.20% year 8.50% year 8.75% year 8.85% Maturity 7year Syear 9year 10year 11year 12year YTM Maturity 9.15% 13year 9.25% 14year 9.35% 15year 9.47% 16year 9.52% 17year 9.77% 18year YTM 10.45 % 10.65 % 10.75 % 10.95 % 11.00 % 11.25 % Assume that there are no liquidity premiums. - To the nearest basis point, what is the expected one year forward rate in year 3? - What is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today? 3. Consider a bond paying a coupon rate of 9.25% per year semiannually when the market interest rate is only 3.7% per half-year. The bond has five years until maturity. Find the bond's price today and six months from now after the next coupon is paid The bond pays $46.25 every six months. Current price: [$46.25 × Annuity factor(3.7%, 10)] + [$1,000 × PV factor(3.7%, 10)] = $1,076.16 Assuming the market interest rate remains 3.7% per half year, price six months from nov [$46.25 × Annuity factor(3.7%, 9)] + [$1,000 × PV factor(3.7%, 9)] = $1,069.73 4. You are evaluating a company's stock. The stock just paid a dividend of $1.75. Dividends are expected to grow at a constant rate of 5 for long time into the future. The required rate of return (Rs) on the stock is 12 percent. What is the fair present value? $26.25 5. A preferred stock is expected to pay a constant quarterly dividend of $1.25 per quarter into the future. The required rate of return, Rs, on the preferred stock is 13.5 percent. What is the fair value (or price) of this stock? A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate, a 7 percent promised YTM, and 10 years to maturity. What is the bond's duration? 2. 456 Solution: 7.35 years YIELD CURVE FOR ZERO COUPON BONDS RATED AA Maturity 1 2 3 6 YTM year 8.00% year 8.11% year 8.20% year 8.50% year 8.75% year 8.85% Maturity 7year Syear 9year 10year 11year 12year YTM Maturity 9.15% 13year 9.25% 14year 9.35% 15year 9.47% 16year 9.52% 17year 9.77% 18year YTM 10.45 % 10.65 % 10.75 % 10.95 % 11.00 % 11.25 % Assume that there are no liquidity premiums. - To the nearest basis point, what is the expected one year forward rate in year 3? - What is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today? 3. Consider a bond paying a coupon rate of 9.25% per year semiannually when the market interest rate is only 3.7% per half-year. The bond has five years until maturity. Find the bond's price today and six months from now after the next coupon is paid The bond pays $46.25 every six months. Current price: [$46.25 × Annuity factor(3.7%, 10)] + [$1,000 × PV factor(3.7%, 10)] = $1,076.16 Assuming the market interest rate remains 3.7% per half year, price six months from nov [$46.25 × Annuity factor(3.7%, 9)] + [$1,000 × PV factor(3.7%, 9)] = $1,069.73 4. You are evaluating a company's stock. The stock just paid a dividend of $1.75. Dividends are expected to grow at a constant rate of 5 for long time into the future. The required rate of return (Rs) on the stock is 12 percent. What is the fair present value? $26.25 5. A preferred stock is expected to pay a constant quarterly dividend of $1.25 per quarter into the future. The required rate of return, Rs, on the preferred stock is 13.5 percent. What is the fair value (or price) of this stock?

Answer rating: 100% (QA)

1To calculate the expected one year forward rate in year 3 we need to use the formula 1 Y3 3 1 Y2 2 1 F21 where Y3 is the yield on a 3year AA zero cou... View the full answer