(a) A bond dealer wishes to make a profit from coupon stripping. The dealer buys a...

 

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(a) A bond dealer wishes to make a profit from coupon stripping. The dealer buys a $10,000,000 3-year corporate par value bond that pays semi-annual interest at j = 8% and pays $10,000,000 for the bond. The dealer then strips the coupons and sells each of them separately, along with selling the resulting strip bond. The dealer will sell the coupons and the strip bond at the following yield rates (all are j₂): Maturity 0.5 years 1.5 years 2.0 years 2.5 years 3.0 years 4.6% Yield (₂) 3.4% 5.0% 5.4% x% If the total profit made by the bond dealer is $32,013.75, what is the value of x? (5 marks) 1.0 years 4.0% (b) A 10-year $100,000 bond, redeemable at 103. paying interest at j2 = 7%, is sold to Investor A. who wishes to yield ja = 7%. Investor A strips the coupons. She sells the strip bond to Investor B who wishes to yield j12= 6.6%. Investor A keeps the first 5 years of coupons, but sells the last 5 years worth of coupons to Investor C who wishes to yield ja = 6%. What rate of return does Investor A earn on her investment? (be accurate - use interpolation if needed) (6 marks) (a) A bond dealer wishes to make a profit from coupon stripping. The dealer buys a $10,000,000 3-year corporate par value bond that pays semi-annual interest at j = 8% and pays $10,000,000 for the bond. The dealer then strips the coupons and sells each of them separately, along with selling the resulting strip bond. The dealer will sell the coupons and the strip bond at the following yield rates (all are j₂): Maturity 0.5 years 1.5 years 2.0 years 2.5 years 3.0 years 4.6% Yield (₂) 3.4% 5.0% 5.4% x% If the total profit made by the bond dealer is $32,013.75, what is the value of x? (5 marks) 1.0 years 4.0% (b) A 10-year $100,000 bond, redeemable at 103. paying interest at j2 = 7%, is sold to Investor A. who wishes to yield ja = 7%. Investor A strips the coupons. She sells the strip bond to Investor B who wishes to yield j12= 6.6%. Investor A keeps the first 5 years of coupons, but sells the last 5 years worth of coupons to Investor C who wishes to yield ja = 6%. What rate of return does Investor A earn on her investment? (be accurate - use interpolation if needed) (6 marks)

Answer rating: 100% (QA)

aThe value of x is 54 3year corporate par value bond that pays semiannual interest at je 8 and pays 10000000 for rates all are jz Maturity 05 years 10 ... View the full answer