Investment analysis

Question 4. 8 Points

A bond with a face value of $1,000, a time to maturity of 10 years, and a 6% coupon rate, currently sells at a price of $1,077.95. The bond pays its coupons semiannually. Assume that, in six months, the yield to maturity (YTM) will be 5.20% (annualized).

Calculate the holding period return (HPR) on the bond if you hold it for six months. You sell the bond after the coupon is paid.

Also read: Introduction to Investment Analysis

Question 5. 6 Points

A bond has a face value of $1,000, a time to maturity of 10 years, a 5% coupon rate, and currently sells at a price of $1,125.65. The bond pays its coupons semiannually. Calculate the yield to call (YTC) if the bond is callable in 5 years at a call price of $1,050.

Question 6. 8 Points

A three-year bond has a coupon rate of 8% and is priced at $950.26. The face value is $1,000 and the bond pays annual coupons.

Calculate the realized (annualized) compound YTM on the bond if the one-year interest rate (with certainty) over the next three years will be, r1 = 8%, r2 = 10%, and r3 = 12%. You buy the bond today and hold it until maturity.

[Note: Assuming today is t = 0 and t = 1 is one year from today, r1 represents the interest rate for the period, t = 0 to t = 1. Similarly, r2 represents the interest rate for the period, t = 1 to t = 2, and r3 represents the interest rate for the period t = 2 to t = 3.]

Question 7. 12 Points

The price of a one-year zero-coupon bond is $943.396, the price of a two-year zero is $873.439, and the price of a three-year zero-coupon bond is $793.832. The bonds (each) have a face value of $1,000. Assume annual compounding.

a) Compute the yield to maturity (YTM) on the one-year zero, the two-year zero, and the three-year zero.

b) Compute the implied forward rates for year 2 and for year 3.

c) Assume that the expectations hypothesis is correct. Based on your answers to parts a) and b), can you conclude that interest rates are expected to rise? Explain.

d) If the expectations hypothesis is correct, what will the pure yield curve be next year? [In other words, compute the yields on both a one-year zero and a two-year zero in one year from today.] Use the data from your answers to parts a) and b).

More to read: Introduction to Investment Analysis

Question 8. 14 Points

The YTM (yield to maturity) on a one-year zero-coupon bond is 5% and the YTM on a two-year zero-coupon bond is 6%. The treasury is planning to issue a 2-year, annual coupon bond with a coupon rate of 7% and a face value of $1,000.

a) Compute the value of the two-year coupon bond.

b) Compute the yield to maturity of the two-year coupon bond.

c) If the expectations hypothesis is correct, what is the market expectation of the price that the two-year coupon bond will sell for in one year (from today)?

d) If the liquidity preference theory is correct, what is the market expectation of the price that the two-year coupon bond will sell for in one year (from today)? Assume a liquidity premium of 1%.

Last Updated on October 11, 2020 by Essay Pro