. At time t=0 three bonds are available for the same price. The first bond will...

 

Transcribed Image Text:

. At time t=0 three bonds are available for the same price. The first bond will give the investor five equal payments of P₁, paid monthly and beginning in one month. The second bond will give the investor three equal payments of P2, paid every second month and beginning now. The third bond is a coupon bond with face value F, coupon rate c per month, maturity in five months, and monthly payments beginning in one month. The return over a one month period is R and stays at this rate for the life of all three bonds. (a) Find the value at t = 0 of the first bond in terms of P₁ and R. (b) Find the value at t = 0 of the second bond in terms of P2 and R. and (c) Find the value at t = 0 of the third bond in terms of F, C R. (d) Write down an equation for the present value of the second bond which is valid for any time t≥ 0 months, in terms of three zero-coupon bonds P(t, T;) with i = 1,2,3 (where T₁, T2₂ and T3 are appropriately-chosen values which you must clearly state in your answer). (e) Why is the value of P(t, T) = 0 when t > T? Explain your answer. (f) All three bonds are currently available for $348. If P₁ = $85, P₂ = $132, F = $300, c = 11% per month, and R = 1.07, which bond is the best choice for the investor? Explain your reasoning clearly. . At time t=0 three bonds are available for the same price. The first bond will give the investor five equal payments of P₁, paid monthly and beginning in one month. The second bond will give the investor three equal payments of P2, paid every second month and beginning now. The third bond is a coupon bond with face value F, coupon rate c per month, maturity in five months, and monthly payments beginning in one month. The return over a one month period is R and stays at this rate for the life of all three bonds. (a) Find the value at t = 0 of the first bond in terms of P₁ and R. (b) Find the value at t = 0 of the second bond in terms of P2 and R. and (c) Find the value at t = 0 of the third bond in terms of F, C R. (d) Write down an equation for the present value of the second bond which is valid for any time t≥ 0 months, in terms of three zero-coupon bonds P(t, T;) with i = 1,2,3 (where T₁, T2₂ and T3 are appropriately-chosen values which you must clearly state in your answer). (e) Why is the value of P(t, T) = 0 when t > T? Explain your answer. (f) All three bonds are currently available for $348. If P₁ = $85, P₂ = $132, F = $300, c = 11% per month, and R = 1.07, which bond is the best choice for the investor? Explain your reasoning clearly.

Answer rating: 100% (QA)

Lets break this down step by step a The first bond pays five equal monthly payments starting in one month To find its value at t 0 we can calculate th... View the full answer