a) You will receive $1,000 from your parents as a birthday gift in half year. You...

 

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a) You will receive $1,000 from your parents as a birthday gift in half year. You have decided to invest it at 5% per annual until you have $1,629. How many years will you have to wait from NOW until you achieve your target? (3 marks) b) You will receive fifty annual payments of $1,000 each beginning at the end of the 40th year. What is the present value of these payments? The appropriate annual discount rate is 10%. (5 marks) Question 2 (8 marks) a) A bond of 10 years maturity is left with 8 years to maturity today. Its coupon rate is 10%, paying annual coupon with par value of $1,000. What is the price of the bond today if the yield to maturity is 8%? Is it a premium bond or discount bond? (5 marks) b) Recently, a 30-year corporate bond issued by Liz Co. has been downgraded by a credit rating agency from AAA to B. Other things being constant, what would you expect to happen to the price and yield of the bond as a consequence of the downgrade? Act Go (3 marks) a) You will receive $1,000 from your parents as a birthday gift in half year. You have decided to invest it at 5% per annual until you have $1,629. How many years will you have to wait from NOW until you achieve your target? (3 marks) b) You will receive fifty annual payments of $1,000 each beginning at the end of the 40th year. What is the present value of these payments? The appropriate annual discount rate is 10%. (5 marks) Question 2 (8 marks) a) A bond of 10 years maturity is left with 8 years to maturity today. Its coupon rate is 10%, paying annual coupon with par value of $1,000. What is the price of the bond today if the yield to maturity is 8%? Is it a premium bond or discount bond? (5 marks) b) Recently, a 30-year corporate bond issued by Liz Co. has been downgraded by a credit rating agency from AAA to B. Other things being constant, what would you expect to happen to the price and yield of the bond as a consequence of the downgrade? Act Go (3 marks)

Answer rating: 100% (QA)

a To calculate the number of years required to achieve the target we can use the formula for compound interest Future Value Present Value 1 Interest R... View the full answer