Mr. Chan is the portfolio manager for a large insurance company. He is considering investing $5 million to purchase some bonds of Khabet Inc. All of Khabet's bonds have market prices that imply a yield to maturity of 8% (paid semi-annually). He is particularly interested in a bond that matures in 6 years and pays a 10% coupon. At what price should this bond currently sell? a) You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $250,000 today or receive payments of $1,400 a month for 20 years. You can earn 6 percent on your money. Which option should you take? b) You want to buy a house. You have $20,000 for down payment and closing costs. The down payment is 10% and the closing costs are 10% of the loan amount. The bank is willing to allow you to make monthly payments of 30% of your salary at an annual interest rate of 8% for 30 years, and your annual salary is $36,000. c) How much can you offer for the house?

Mr. Chan is the portfolio manager for a large insurance company. He is considering investing $5 million to purchase some bonds of Khabet Inc. All of Khabet's bonds have market prices that imply a yield to maturity of 8% (paid semi-annually). He is particularly interested in a bond that matures in 6 years and pays a 10% coupon. At what price should this bond currently sell? a) You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $250,000 today or receive payments of $1,400 a month for 20 years. You can earn 6 percent on your money. Which option should you take? b) You want to buy a house. You have $20,000 for down payment and closing costs. The down payment is 10% and the closing costs are 10% of the loan amount. The bank is willing to allow you to make monthly payments of 30% of your salary at an annual interest rate of 8% for 30 years, and your annual salary is $36,000. c) How much can you offer for the house?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 15P

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You are a financial manager and you have bonds worth $3,000,000 in your portfolio which have a 7 percent coupon rate and will be maturing in 10 years from now. The market rate is also 7 percent. Suppose a futures contract on these bonds is available with a standard contract size of $300,000 per contract. a) If the market interest rates change to 9 percent, show through relevant calculations, how your hedge will protect you from loss. What if the interest rate in the market went down to 5%?
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Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 10.0%, but she expects them to fall to 8.0% within a year. As a result, Stacy is thinking about buying either a 25-year, zero-coupon bond or a 20-year, 8.5% bond. (Both bonds have $1,000 par values and carry the same agency rating.) Assuming that Stacy wants to maximize capital gains, which of the two issues should she select? What if she wants to maximize the total return (interest income and capital gains) from her investment? Why did one issue provide better capital gains than the other? Based on the duration of each bond, which one should be more price volatile? The capital gain of the zero-coupon bond is $65.4065.40. (Round to the nearest cent.) The capital gain of the coupon-bearing bond is $nothing. (Round to the nearest cent.)