Sam and Ronnie each invest $500,000 per t-0 when the risk-free rate (for all maturities) is 5%:
Question:
Sam and Ronnie each invest $500,000 per t-0 when the risk-free rate (for all maturities) is 5%: Sam has purchased $500,000 of 6-year zero coupon bonds, where each bond has a face value of $10,000;Ronnie purchased $500,000 worth of 8% 7-year coupon bonds, where each bond has a face value of $20,000.
What is the total face value of all the bonds Sam has purchased?
How many bond units did Sam buy?(Fractions are OK)
What is the total face value of all the bonds Ronnie has purchased?
How many bond units did Ronnie buy?(Fractions are OK)
Suppose Sam and Ronnie liquidate their positions at t-4.
If interest rates remain unchanged throughout the holding period, how much money will Sam have after he liquidates his position at t-4?
What is Sam's Holding Period Performance (HPR) during these four years?
What is Sam's annualized holding performance over these four years?
If interest rates have remained unchanged throughout the holding period, and assuming that Ronnie reinvests the coupons he receives before t-4 by buying 1-year zero coupon bonds, how much money will Ronnie have, after liquidating his position at t-4?
What is Ronnie's compound return over these four years?
Again assume that Sam and Ronnie liquidate their positions at t 4.But let's now assume that the interest rate at t-1 increases to 7% (for all maturities), to t-2 the interest rate drops to 6%, to t-3 the interest rate drops to 5.5%, and that at t-4 the interest rate returns to 5%.
Who will have more money at the moment t 4, Sam or Ronnie?(You don't have to calculate anything here, you can just cite some of the results mentioned in the class.)
Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe