Suppose a 5-year zero-coupon Treasury bond with face value $1000 has a 5% yield (annually compounded...
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Suppose a 5-year zero-coupon Treasury bond with face value $1000 has a 5% yield (annually compounded ). (a) What price does this bond sell for? (b) Suppose another zero -coupon Treasury bond also has a 5% yield, but sells for $325.57. What is the maturity of this bond ? Which of the following investments do you prefer? (a) Purchase a zero -coupon bond, which pays $1000 in ten years, for a price of $550. (b) Invest $550 for ten years in Chase at a guaranteed annual interest rate of 5.5%. Suppose you get for free one of following two securities: (a) an annuity that pays $10,000 at the end of each of the next 6 years; or (b) a perpetuity that pays $10,000 at the end of each year forever, but payments do not begin until 10 years from now (that is, the first cash payment from this security is 11 years from today). Which security would you choose if the annual interest rate is 5%? Does your answer change if the interest rate is 10%? Explain why or why not. Suppose a hedge fund manager earns 1% per trading day. There are 250 trading days per year. Answer the following questions: (a) What will be your annual return on $100 invested in her fund if she allows you to reinvest in her fund the 1% you earn each day? (b) What will be your annual return assuming she puts all of your daily earnings into a zero-interest- bearing checking account and pays you everything earned at the end of the year? (c) Can you summarize when it is proper to "annualize" using APR (annual percentage rate) versus EAR (effective annual rate)? Suppose a 5-year zero-coupon Treasury bond with face value $1000 has a 5% yield (annually compounded ). (a) What price does this bond sell for? (b) Suppose another zero -coupon Treasury bond also has a 5% yield, but sells for $325.57. What is the maturity of this bond ? Which of the following investments do you prefer? (a) Purchase a zero -coupon bond, which pays $1000 in ten years, for a price of $550. (b) Invest $550 for ten years in Chase at a guaranteed annual interest rate of 5.5%. Suppose you get for free one of following two securities: (a) an annuity that pays $10,000 at the end of each of the next 6 years; or (b) a perpetuity that pays $10,000 at the end of each year forever, but payments do not begin until 10 years from now (that is, the first cash payment from this security is 11 years from today). Which security would you choose if the annual interest rate is 5%? Does your answer change if the interest rate is 10%? Explain why or why not. Suppose a hedge fund manager earns 1% per trading day. There are 250 trading days per year. Answer the following questions: (a) What will be your annual return on $100 invested in her fund if she allows you to reinvest in her fund the 1% you earn each day? (b) What will be your annual return assuming she puts all of your daily earnings into a zero-interest- bearing checking account and pays you everything earned at the end of the year? (c) Can you summarize when it is proper to "annualize" using APR (annual percentage rate) versus EAR (effective annual rate)?
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Answer rating: 100% (QA)
a The price of the bond is calculated using the formula Price Face Value 1 Yield n where n number of years until maturity For the 5year zerocoupon Tre... View the full answer
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9781264101566
11th Edition
Authors: Richard A. Brealey, Stewart C. Myers, Alan J. Marcus
Posted Date:
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