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(Solution Download) Assume you have a one-year investment horizon and are trying to choose among three bonds. All have t


 

 

 

 

 

 

 

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 9 years. The first is a zero-coupon bond that pays

 

$1,000 at maturity. The second has an 7.4% coupon rate and pays the

 

$74 coupon once per year. The third has a 9.4% coupon rate and pays

 

the $94 coupon once per year.

 

 

 

 

 

 

 

 

 

a.

 

If all three bonds are now priced to yield 7.4% to maturity,

 

what are their prices? (Do not round

 

intermediate calculations. Round your answers to 2

 

decimal places.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zero7.4% Coupon9.4% Coupon
  Current prices$        $     $      

 

 

 

 

 

 

 

 

b-1.

 

If you expect their yields to maturity to be 7.4% at the

 

beginning of next year, what will their prices be then? (Do

 

not round intermediate calculations. Round your

 

answers to 2 decimal places.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zero7.4% Coupon9.4% Coupon
  Price one year from now$      $      $      

 

 

 

 

 

 

 

 

b-2.

 

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.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zero7.4% Coupon9.4% Coupon
  Rate of return%      %      %      

 

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