Use information from Table 15.5. a. What is the price of a bond that pays one unit
Question:
a. What is the price of a bond that pays one unit of the S&P index in 2 years?
b. What quarterly dollar coupon is required if the bond is to sell at par?
c. What quarterly payment of fractional units of the S&P index is required if the bond is to sell at par?
TABLE 15.5 Table for problems. Quarter 6 Oil forward price () 210 2. 208 20.5 20. 20.0 19.9 19.8 Zero-coupon bond 0.9852 0.970 0.9546 0.9388 023 0.9075 0.8919 0.8763 price (S)
Step by Step Answer:
a S 0 e T 1200 e 00152 11645 b As in equation ...View the full answer
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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