The (annual compounding) yields on 1-year and 2-year, risk-free, zero-coupon bonds are 2.5% and 3.0%, respectively....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The (annual compounding) yields on 1-year and 2-year, risk-free, zero-coupon bonds are 2.5% and 3.0%, respectively. a. What are the values of $100 face amount of each these zero-coupon bonds? (1 point each) b. What is the value of a 2-year, risk-free bond with a coupon rate of 10% (annual coupons) and a face amount of $100? (2 points) c. Given the value in part (b) above, what is the (annual compounding) yield-to-maturity on this bond? (2 points) d. What is the value of a 2-year, risk-free bond with a coupon rate of 15% (annual coupons) and a face amount of $100? (2 points) e. Given the value in part (d) above, what is the (annual compounding) yield-to-maturity on this bond? (2 points) f. Consider a 1-year forward contract on a 1-year, $100 face amount, zero-coupon bond. This forward contract is entered into at time 0, and it specifies the price at time 1 that will be paid for the 1-year bond at that time. The price is set such that no exchange of cash is necessary at time 0. In other words, it is a contract, from the buyer's perspective, with cash flows of 0 1 2 Time Cash flow 0 -P 100 where P is the forward price at time 1 that is set at time 0. This forward contract can be priced via the law of one price (no-arbitrage), i.e., the cash flows can be replicated using positions in the 1-year and 2-year zero coupon bonds. i. How much face amount of the 2-year bond must you buy in order to replicate the time 2 cash flow of the forward contract, i.e., the $100 at time 2? (Put this value in cell G31.) What time 0 cash flow will the purchase of this bond generate, i.e., what is its cost? (Since it is a cost, the cash flow should be negative. Put the cost in cell E31.) (1 point each) ii. The forward contract has no cash flow at time 0. To offset the cost above, it is necessary to sell exactly this amount (in present value terms) of the 1-year zero coupon bond. Selling this bond will require you to pay the face amount at maturity (at time 1). What are the cash flows associated with this sale at times 0 and 1? In other words, how much face amount of the 1-year bond must you sell (which will generate a negative cash flows at time 1 equal to this amount), and how much cash flow will this sale generate at time 0? (1 point each) iii. Row 35 will show the sum of the cash flows generated by the two transactions in i and ii above, i.e., the purchase of a 2-year, zero-coupon bond and the sale of a 1-year zero-coupon bond. These cash flows should replicate the forward contract, i.e., a contract with 0 cash flow at time 0, a negative cash flow at time 1, and a cash flow of $100 at time 2. The face amount of the 1-year zero, i.e., the negative cash flow at time 1, is the forward price. What is the implied forward rate, i.e., the yield on the 1- year bond purchased at time 1 for P, that pays $100 at maturity (time 2)? (2 points) 10 11 Q1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 -P 29 30 1 31 0.00 32 1 33 34 0 1 35 #VALUE! #VALUE! #VALUE! 36 Fwd rate 37 please do only D,E and F parts in 40 minutes please urgently... I'll give you up thumb definitely 45 a b PO 14 e C d Coupon f Zero-coupon bonds Maturity Yield Face amt Maturity Value i ii Coupon Face amt Maturity Value YTM| Face amt Maturity Value YTM Time CF Time CF Time CF Time Total CF 1 2.5% 100 1 10% 100 2 years 15% 100 2 years II!!! 2 3.0% 2 2 100 2 2 0.00 2 8 9 EE 10 A 11 Q1 12 13 14 15 16 17 18 19 20 21 22 23 24 formula: A B C 8 9 10 11 Q1 12 13 14 15 16 17 18 19 20 21 22 23 24 a b C a b C B D Zero coupon bonds Maturity Yield Face amt maturity Value Coupon Face amt maturity value YTM C D E Zero coupon bonds Maturity Yield 2.50% Face amt 100 maturity 1 Value 97.56 Coupon 10% Face amt 100 maturity value YTM E 113.44 2.98% F 2 3.00% 2 94.26 2 years 1 0.025 100 1 =E15/(1+E13)^E16 0.1 100 2 =(E18*E19)/(1+E13)^E12+(E18 E19+E19)/(1+F13)^F12 =RATE(E20, E19 E18,-E21,E19) F G 2 0.03 2 =E15/(1+F13)^F16 years The (annual compounding) yields on 1-year and 2-year, risk-free, zero-coupon bonds are 2.5% and 3.0%, respectively. a. What are the values of $100 face amount of each these zero-coupon bonds? (1 point each) b. What is the value of a 2-year, risk-free bond with a coupon rate of 10% (annual coupons) and a face amount of $100? (2 points) c. Given the value in part (b) above, what is the (annual compounding) yield-to-maturity on this bond? (2 points) d. What is the value of a 2-year, risk-free bond with a coupon rate of 15% (annual coupons) and a face amount of $100? (2 points) e. Given the value in part (d) above, what is the (annual compounding) yield-to-maturity on this bond? (2 points) f. Consider a 1-year forward contract on a 1-year, $100 face amount, zero-coupon bond. This forward contract is entered into at time 0, and it specifies the price at time 1 that will be paid for the 1-year bond at that time. The price is set such that no exchange of cash is necessary at time 0. In other words, it is a contract, from the buyer's perspective, with cash flows of 0 1 2 Time Cash flow 0 -P 100 where P is the forward price at time 1 that is set at time 0. This forward contract can be priced via the law of one price (no-arbitrage), i.e., the cash flows can be replicated using positions in the 1-year and 2-year zero coupon bonds. i. How much face amount of the 2-year bond must you buy in order to replicate the time 2 cash flow of the forward contract, i.e., the $100 at time 2? (Put this value in cell G31.) What time 0 cash flow will the purchase of this bond generate, i.e., what is its cost? (Since it is a cost, the cash flow should be negative. Put the cost in cell E31.) (1 point each) ii. The forward contract has no cash flow at time 0. To offset the cost above, it is necessary to sell exactly this amount (in present value terms) of the 1-year zero coupon bond. Selling this bond will require you to pay the face amount at maturity (at time 1). What are the cash flows associated with this sale at times 0 and 1? In other words, how much face amount of the 1-year bond must you sell (which will generate a negative cash flows at time 1 equal to this amount), and how much cash flow will this sale generate at time 0? (1 point each) iii. Row 35 will show the sum of the cash flows generated by the two transactions in i and ii above, i.e., the purchase of a 2-year, zero-coupon bond and the sale of a 1-year zero-coupon bond. These cash flows should replicate the forward contract, i.e., a contract with 0 cash flow at time 0, a negative cash flow at time 1, and a cash flow of $100 at time 2. The face amount of the 1-year zero, i.e., the negative cash flow at time 1, is the forward price. What is the implied forward rate, i.e., the yield on the 1- year bond purchased at time 1 for P, that pays $100 at maturity (time 2)? (2 points) 10 11 Q1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 -P 29 30 1 31 0.00 32 1 33 34 0 1 35 #VALUE! #VALUE! #VALUE! 36 Fwd rate 37 please do only D,E and F parts in 40 minutes please urgently... I'll give you up thumb definitely 45 a b PO 14 e C d Coupon f Zero-coupon bonds Maturity Yield Face amt Maturity Value i ii Coupon Face amt Maturity Value YTM| Face amt Maturity Value YTM Time CF Time CF Time CF Time Total CF 1 2.5% 100 1 10% 100 2 years 15% 100 2 years II!!! 2 3.0% 2 2 100 2 2 0.00 2 8 9 EE 10 A 11 Q1 12 13 14 15 16 17 18 19 20 21 22 23 24 formula: A B C 8 9 10 11 Q1 12 13 14 15 16 17 18 19 20 21 22 23 24 a b C a b C B D Zero coupon bonds Maturity Yield Face amt maturity Value Coupon Face amt maturity value YTM C D E Zero coupon bonds Maturity Yield 2.50% Face amt 100 maturity 1 Value 97.56 Coupon 10% Face amt 100 maturity value YTM E 113.44 2.98% F 2 3.00% 2 94.26 2 years 1 0.025 100 1 =E15/(1+E13)^E16 0.1 100 2 =(E18*E19)/(1+E13)^E12+(E18 E19+E19)/(1+F13)^F12 =RATE(E20, E19 E18,-E21,E19) F G 2 0.03 2 =E15/(1+F13)^F16 years
Expert Answer:
Related Book For
Financial Accounting an introduction to concepts, methods and uses
ISBN: 978-0324789003
13th Edition
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis
Posted Date:
Students also viewed these accounting questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
This case study on project evaluation is applicable for beginning courses in corporate finance or finance strategy. Two alternative investment options are available to evaluate. Challenges are...
-
1. Suppose your personal federal income tax rate is 30%. You are trying to decide which of the following bonds to invest in. Both are BBB rated and therefore equally risky. State of Illinois Bond...
-
Research about the competitive and comparative advantage of the Argentina in terms of physical and human resources and how it is making use of these resources for international trade purpose. 3....
-
What are the key elements of the scientific method and how does this method relate to economic principles and laws?
-
Powersoft Company is engaged in developing computer software for the small business and home computer market. Most of the computer programmers are involved in developmental work designed to produce...
-
A batch total that is calculated by summing the part numbers sold in a batch of 50 sales invoices is called a a. financial total c. record count b. hash total d. part count
-
How does the task life cycle type affect our attempts to level the resource loads?
-
14. Lufthansa - A/P Lufthansa (German airliner) bought an aircraft, 787 Dreamliner, from Boeing, a U.S. company, and agreed to pay $30 million payable in six months. Lufthansa is concerned with the...
-
An earthwork contractor is considering to purchase a new excavator which will cost $130,000 including tax and transportation expenses. Answer the following questions about depreciation. Note: GDS...
-
Martha Wheaton, Bess Chen, and Sam Smith were partners in an urban Calgary tea shop called Wake and showed the following account balances as of December 31, 2023: Account balances December 31, 2023...
-
Avantika Limited bought a plant and equipment costing $900,000 on 1 January 2023. The estimated useful life of the plant and equipment is 5 years. The scrap value at the end of the useful life is...
-
On January 1, 2021, Flesh-n-Bone Corporation acquired 30% of Doug Corporation's 200,000 outstanding shares at P50 per share. Doug's net assets had a book value on the same date at P8,200,000. On the...
-
Explain the working of a competitive discussion. Consider the importance of communication in any discussion. Consider the impact of making disparaging statements on social media, such as leaving a...
-
Why should students use sensory memory, short-term memory and long-term memory techniques and how can they use these techniques to study for the exam? Can you explain the coding, storage and...
-
Management accountants' must be 'value creators' to remain relevant.' Required: Using the academic literature, discuss the above statement in the context of strategic planning and sustainable...
-
Imagine that you are a government official whose objective is to generate more tax revenue. In order to generate this additional revenue you are given two options. The first option is to raise the...
-
Feller Company purchased a site for a limestone quarry for $100,000 on January 2, 2019. It estimate that the quarry will yield 400,000 tons of limestone. It estimates that its retirement obligation...
-
In a cash basis system, firms recognize revenues when they receive cash from customers and recognize expenses as they pay cash for goods and services. How does a cash basis system violate the...
-
Journal entries for coupons. Morrison's Cafeteria sells coupons that customers may use later to purchase meals. Each coupon book sells for $25 and has a face value of $30: that is, the customer can...
-
Analyzing, fixed asset turnover three years The following information relates to The Walt Disney Company (Disney), an entertainment company (amounts in millions): a. Compute the used asset turnover...
-
An alternative algorithm for finding a minimal undirected spanning tree of a graph of \(n\) vertices is called Prim's algorithm. Begin with a single vertex. At any stage, check edges not in the...
-
The matrix below gives the weights of directed edges connecting certain pairs of vertices in a directed graph. List shortest possible paths from vertex 1 to each other vertex in the network. 1215 121...
-
Information is to flow from a source \(v_{0}\) to each of seven other locations labeled \(v_{1}, \ldots, v_{7}\) in the diagram below. Find a least costly way of doing this if the edge weights...
Study smarter with the SolutionInn App