Louis Winthorpe IIl was evaluating investment opportunities to determine what he should do with his money....
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Louis Winthorpe IIl was evaluating investment opportunities to determine what he should do with his money. One of the investments that he was evaluating was investing $10,000,000 in US corporate securities (recall that US corporates pay interest semi-annually). Oracle just priced a $7bn in US investment grade securities with differing maturities. They priced the following: Security ORCL 5.80% 11/10/2025 ORCL 6.15% 11/09/2029 ORCL 6.25% 11/09/2032 Issued Price $1,000,000 99.00 $1,250,000 101.25 $2,250,000 101.00 Louis likes the company and wants to invest his money in one of these securities (all have face value of $1,000 per bond). Assume today is 11/9/23 and the bonds are 2,6,and 9 years till maturity) 1. If he wants to invest his money in the bond that offers the greatest yield to maturity, which bond should he invest in? 2. If the yield to maturity on the ORCL 5.8% '25 was 5.43%, what would the price of the security be? 3. If Louis purchases the bond so it settles on 12/15/22 and the first coupon payment is made on 5/10/2023, how much accrued interest is he paying for each bond as part of his purchase price (recall that US corporates use the 30/360 methodology for calculating accrued interest and interest accrues between semi-annual payment dates)? 4. If while determining what he wants to invest in, Louis concludes that US treasury rates will be higher next year, what would that do to the price of the bonds a year from now? a. Please include in your answer the impact that rates have on principal and reinvestment opportunities. 5. Louis calculates the below spot and forward rates. afo (6-month spot rate) 4.5% 6.4% 8.1% 10.0% 1f₂ If he is correct, what would he estimate the value of the ORCL 5.8'25 bond will be in two years (assume that there is no credit deterioration, and the market assumption is the face value will be received at maturity)? Louis Winthorpe IIl was evaluating investment opportunities to determine what he should do with his money. One of the investments that he was evaluating was investing $10,000,000 in US corporate securities (recall that US corporates pay interest semi-annually). Oracle just priced a $7bn in US investment grade securities with differing maturities. They priced the following: Security ORCL 5.80% 11/10/2025 ORCL 6.15% 11/09/2029 ORCL 6.25% 11/09/2032 Issued Price $1,000,000 99.00 $1,250,000 101.25 $2,250,000 101.00 Louis likes the company and wants to invest his money in one of these securities (all have face value of $1,000 per bond). Assume today is 11/9/23 and the bonds are 2,6,and 9 years till maturity) 1. If he wants to invest his money in the bond that offers the greatest yield to maturity, which bond should he invest in? 2. If the yield to maturity on the ORCL 5.8% '25 was 5.43%, what would the price of the security be? 3. If Louis purchases the bond so it settles on 12/15/22 and the first coupon payment is made on 5/10/2023, how much accrued interest is he paying for each bond as part of his purchase price (recall that US corporates use the 30/360 methodology for calculating accrued interest and interest accrues between semi-annual payment dates)? 4. If while determining what he wants to invest in, Louis concludes that US treasury rates will be higher next year, what would that do to the price of the bonds a year from now? a. Please include in your answer the impact that rates have on principal and reinvestment opportunities. 5. Louis calculates the below spot and forward rates. afo (6-month spot rate) 4.5% 6.4% 8.1% 10.0% 1f₂ If he is correct, what would he estimate the value of the ORCL 5.8'25 bond will be in two years (assume that there is no credit deterioration, and the market assumption is the face value will be received at maturity)?
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ANSWERS 1 If he wants to invest in the bond offering the greatest yield to maturity he sh... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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