The Slice & Dice Investment Co. needs some help understanding

The Slice & Dice Investment Co. needs some help understanding the intricacies of bond pricing. It has observed the following prices for zero coupon bonds that have no risk of default:

The Slice & Dice Investment Co. needs some help understanding

a. How much should Slice & Dice be willing to pay for a three-year bond that pays a 6-percent coupon, assuming annual coupon payments start one year from now?
b. What is the yield to maturity of the three-year coupon bond?
c. Suppose Slice & Dice purchases this coupon bond and then “un-bundles” it into its four component cash flows: three coupon payments and the par value amount. At what price(s) can Slice & Dice resell each of the first three cash flows (the coupon payments) today?
d. The remaining cash flow (the face value amount) is a “synthetic” three-year zero coupon bond. How much must this “strip bond” be sold for if Slice & Dice is to break even on the investment?
e. What is the yield to maturity on the synthetic three-year zero coupon bond?
f. Why are the answers for (b) and (e)different?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...

Members

  • Access to 1 Million+ Textbook solutions
  • Ask any question from 24/7 available
    Tutors
$9.99
VIEW SOLUTION
OR

Non-Members

Get help from Corporate Finance Tutors
Ask questions directly from Qualified Online Corporate Finance Tutors .
Best for online homework instance.