The market wide discount rates are known to be 0.96 for 1-year and 0.90 for 2- years. You observe that a two-year zero-coupon bond with a face value of £250 trades at £230 and a 1-year zero coupon bond with a face value of £150 trades at £142. What trading strategy do you implement (there is no need to calculate the number or values of the bonds traded) and what do you expect the outcome of this strategy to be if it is mimicked by other institutions in the bond market?

The market wide discount rates are known to be 0.96 for 1-year and 0.90 for 2- years. You observe that a two-year zero-coupon bond with a face value of £250 trades at £230 and a 1-year zero coupon bond with a face value of £150 trades at £142. What trading strategy do you implement (there is no need to calculate the number or values of the bonds traded) and what do you expect the outcome of this strategy to be if it is mimicked by other institutions in the bond market?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 5MC: What would be the value of the bond described in Part d if, just after it had been issued, the...

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What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond? What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)
Citibank has developed a way of creating a zero-coupon bond, called a strip, from the coupon-bearing Treasury bond by selling each of the cash flows underlying the coupon-bearing bond as a separate security. You as a treasurer working for Citibank, have a relatively simple trading strategy. You would buy strips and sell them in the forward market. Suppose for example, that the 3-month interest rate is 4% per annum and the spot price of a strip is $70. Q1)What will be the 3-month forward price? Q2)Assuming that the actual forward price is 72, formulate an arbitrage strategy.
Citibank has developed a way of creating a zero-coupon bond, called a strip, from the coupon bearing Treasury bond by selling each of cash flows underlying the coupon-bearing bond as a separate security. You as a treasurer working for Citibank, have a relatively simple trading strategy. You would buy strips and sell them in the forward market. Suppose for example, that the 3-month interest rate is 4% per annum and the spot price of a strip is $70. What will be the 3-month forward price?Assuming that actual forward price is 72, formulate an arbitrage strategy.
• When the bond’s coupon rate is less than the bondholder’s required return, the bond’s intrinsic value will be less than its par value, and the bond will trade at . For example, assume Oliver wants to earn a return of 10.50% and is offered the opportunity to purchase a $1,000 par value bond that pays a 8.75% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond’s intrinsic value: Intrinsic ValueIntrinsic Value = = A(1+C)1+A(1+C)2+A(1+C)3+A(1+C)4+A(1+C)5+A(1+C)6+B(1+C)6A1+C1+A1+C2+A1+C3+A1+C4+A1+C5+A1+C6+B1+C6 Complete the following table by identifying the appropriate corresponding variables used in the equation. Unknown Variable Name Variable Value A B $1,000 C Semiannual required return Based on this equation and the data, it is to expect that Oliver’s potential bond investment is currently exhibiting an intrinsic value less than…
Assume the zero-coupon yields on default-free securities are as summarized in the following table: Maturity 1 year 2 years 3 years 4 years 5 years Zero-Coupon Yields 4.0% 4.3% 4.5% 4.7% 4.8% What is the price today of a two-year, default-free security with a face value of $1,000 and an annual coupon rate of 6%? Does this bond trade at adiscount, at par, or at a premium? What is the price today of a two-year, default-free security with a face value of $1,000 and an annual coupon rate of 6%? The price is $_____. (Round to the nearest cent.)
Two bonds, A and B, have the same credit rating, the same par value, and the same coupon rate. Bond A has 30 years to maturity and bond B has 5 years to maturity. Please demonstrate your understanding of interest rate risk by answering the following questions : Discuss which bond will trade at a higher price in the market. Discuss what happens to the market price of each bond if the interest rates in the economy go up. Which bond would have a higher percentage price change if interest rates go up? Please substantiate your argument with numerical examples. As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy?
****THIS IS A DIFFERENT QUESTION********* Assume the zero-coupon yields on default-free securities are as summarized in the following table: Maturity 1 year 2 years 3 years 4 years 5 years Zero-Coupon Yields 5.70% 6.20% 6.40% 6.60% 6.80% What is the price of a three-year, default-free security with a face value of $1,000 and an annual coupon rate of 3%? What is the yield to maturity for this bond? What is the price of a three-year, default-free security with a face value of $1,000 and an annual coupon rate of 3%? The price is $______________ (Round to the nearest cent.)
The 1-year spot rate is 6%, the 2-year spot rate is 7%. The Treasury plans to issue 2-year maturity fixed coupon bonds with annual coupon payments, the coupon rate is 8% and face value of the bond is $100. Follow annual compounding. a. What price will the bond sell (using spot rates to calculate)? b. What will the yield to maturity on the bond be? c. If the expectations theory is correct, what will be the market’s expectation of the price the bond will sell one year from today?
Which of the following statements correctly describes the sensitivity of a bond’s price to a change in market yields? Group of answer choices A. The price of a zero-coupon bond with four years until expiry is going to be more sensitive to changes in market yields than the price of a coupon paying bond issued by the same company with the same term to expiry. B. Holding all other factors constant, the longer the term to expiry, the less sensitive a bond’s price is to changing market yields. C. Holding all other factors constant, the higher the coupon rate, the more sensitive is a bond’s price to changing market yields. D. More than one of the other statements are correct.
You are researching a bind with coupon payments of $90 per year and a face value of $1,000. If the yield to maturity on similar bonds is 10%, this bond should Sell at a premium. Sell for $1,000. Sell for either a premium or a discount but you can’t tell which. Sell at a discount. Sell for the same price as the similar bonds regardless of maturity.
You observe the following prices of Treasury securities per $100 of par value: • a 6-month T-bill sells for 96.1538 • a 1-year T-bill sells for 94.2596 • a 1.5-year 10% coupon T-bond sells for 104.9142 Assume that the pure expectations theory of the term structure holds. a.) Calculate the 6-month, 1-year, and 1.5-year spot rates on a bond-equivalent yield basis.
Two bonds A and B have the same credit rating, the same par value and the same coupon rate. Bond A has 30 years to maturity and bond B has five (5) years to maturity. Please demonstrate your understanding of interest rates risk by answering the following questions : Discuss which bond will trade at a higher price in the market Discuss what happens to the market price of each bond if the interest rates in the economy go up. Which bond would have a higher percentage price change if interest rates go up? Please substantiate your argument with numerical examples. As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy?