You have a large amount of money to invest for a short term of two years. You have done some market research and found that an Auckland International Airports bond maturing in one year yields 3%p.a., and an Auckland International Airports bond maturing in two years yields 5%p.a. You are quite confident that because of rising interest rates, in one year's time the two-year bond (which by then will have one year left until maturity) will yield 7%p.a., Explain whether you should invest in the two-year bond now or buy the one-year bond and renew your investment in a year’s time?

You have a large amount of money to invest for a short term of two years. You have done some market research and found that an Auckland International Airports bond maturing in one year yields 3%p.a., and an Auckland International Airports bond maturing in two years yields 5%p.a. You are quite confident that because of rising interest rates, in one year's time the two-year bond (which by then will have one year left until maturity) will yield 7%p.a., Explain whether you should invest in the two-year bond now or buy the one-year bond and renew your investment in a year’s time?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 4P

See similar textbooks

Similar questions

Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. Today you buy $1 of one-year bond and when it matures you plan to use the money you receive to reinvest in one-year bond again. If the expectations theory of the term structure is true, then your expected rate of return for buying a two-year bond today is ______% (round to the neares integer)
You are employed by an investment bank to estimate the value of a coupon-paying bond with the following features. It has a face value of $100,000, pays quarterly coupons at a rate of 10% p.a. and the market required yield to maturity is 8% p.a. compounding quarterly. There is one full quarter until the next payment will be received and the bond matures in 4 years. Which of the following is closest to the market value of the bond? A. $106,789 B. $105,288 C. $94,871 D.$93,473 E. Need more information to answer the question I calculated and I got $106,789, is it correct?
You are considering the purchase of a new issue of bonds which will mature in 10 years. The coupon rate on this bond is 8% annually, with interest being paid every 6 months. If your portfolio has an average annual return of 6 % what is the most you would pay for this bond?
YOUR BANK is thinking to issue a regular coupon bond (debenture) with the following particulars: Maturity = 3 years, Coupon rate = 9%, Face value = $1,500, Coupon payments are annual and paid at the end of a year. In the fixed-income securities market, the yield curve for the bond similar to the one issued by YOUR BANK is flat and it is 7.500% per annum continuously compounded. As per you, what should be the issue (offer) price per bond of YOUR BANK in US dollars?
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 : As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy?
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%?
You just bought a newly issued bond which has a face value of $1,000 and pays its coupon once annually. Its coupon rate is 6%, maturity is 20 years and the yield to maturity for the bond is currently 8%. Suppose that one year after you bought the bond, the yield to maturity of the bond declines to 7%. Find the (before-tax) total dollar return (dollar returns from the coupon payment and capital gains) for the one-year investment period.
You plan to buy an 8% coupon 8-year maturity bond when market rate of return of similar bond is 10%. a) Calculate the proper price for this bond. b) TWO years later, the market rate has changed to 9% and the price of your bond has also changed accordingly. If you sell this bond at the market price, what is the ANNUAL rate of return from your investment in this bond? c) What will be your real rate of return over the two years if inflation rate is 3% in the first year and 5% in the second?
Assume you have a 1-year investment horizon and are trying to choose among threebonds. All have the same degree of default risk and mature in 10 years. The first is azero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rateand pays the $80 coupon once per year. The third has a 10% coupon rate and paysthe $100 coupon once per year.1. If all three bonds are now priced to yield 8% to maturity, what are their prices?2. If you expect their yields to maturity to be 8% at the beginning of next year, whatwill their prices be then? What is your before-tax holding-period return on eachbond? If your tax bracket is 30% on ordinary income and 20% on capital gainsincome, what will your after-tax rate of return be on each?3. Recalculate your answer to (2) under the assumption that you expect the yields tomaturity on each bond to be 7% at the beginning of next year.
After careful consideration, you decide that you want to diversify your portfolio and invest in the bonds of HCA Healthcare. The bonds pay interest annually, will mature in 25 years, and have a coupon rate of 4% on a face value of $1,000. Currently, the bonds are selling for $910. If you are looking for a required return of 7% for this bond, what is the highest price you would be willing to pay?What is the current yield of these bonds?What is the yield to maturity on these bonds if you purchase them at the current price? (Use the Rate function) If you hold the bonds for two years, and interest rates do not change, what total rate of return will you earn, assuming that you pay the market price? If the bonds can be called in 4 years with a call premium of 6% of the face value, what is the yield to call?
Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has a 7.5% coupon rate and pays the $75 coupon once per year. The third has a 9.5% coupon rate and pays the $95 coupon once per year. Assume that all bonds are compounded annually. a. If all three bonds are now priced to yield 7.5% to maturity, what are their prices? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. If you expect their yields to maturity to be 7.5% at the beginning of next year, what will their prices be then? (Do not round intermediate calculations. Round your answers to 2 decimal places.) c. What is your rate of return on each bond during the one-year holding period? (Do not round intermediate calculations. Round your answers to 2 decimal places.)