Chapter 3: Q-10-33I (page 330)
Question: A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 8% and face value $1,000. Find the imputed interest income in the first, second, and last year of the bond’s life.
Answer
1st Year = $17.15
2nd Year = $ 18.54
Last Year = $74.07
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
You are the manager of the bond portfolio of a pension fund. The policies of the fund allow for the use of active strategies in managing the bond portfolio. It appears that the economic cycle is beginning to mature, inflation is expected to accelerate, and, in an effort to contain the economic expansion, central bank policy is moving toward constraint. For each of the situations below, state which one of the two bonds you would prefer. Briefly justify your answer in each case.
a. Government of Canada (Canadian pay), 4% due in 2017, and priced at 101.25 to yield 3.50% to maturity;
or
Government of Canada (Canadian pay), 4% due in 2027, and priced at 95.75 to yield 4.19% to maturity.
b. Texas Power and Light Co., 5½% due in 2022, rated AAA, and priced at 85 to yield 8.1% to maturity;
or
Arizona Public Service Co., 5.45% due in 2022, rated A 2 , and priced at 80 to yield 9.1% to maturity.
c. Commonwealth Edison, 2¾% due in 2021, rated Baa, and priced at 81 to yield 7.2% to maturity;
or
Commonwealth Edison, 9⅜% due in 2021, rated Baa, and priced at 114 to yield 7.2% to maturity.
d. Shell Oil Co., 6¾% sinking fund debentures due in 2026, rated AAA (sinking fund begins in 2015 at par), and priced at 89 to yield 7.1% to maturity;
or
Warner-Lambert, 6⅞% sinking fund debentures due in 2026, rated AAA (sinking fund begins in 2016 at par), and priced at 95 to yield 7% to maturity.
e. Bank of Montreal (Canadian pay), 4% certificates of deposit due in 2014, rated AAA, and priced at 100 to yield 4% to maturity;
or
Bank of Montreal (Canadian pay), floating-rate notes due in 2018, rated AAA.
Coupon currently set at 3.7% and priced at 100 (coupon adjusted semiannually to .5% above the three-month Government of Canada Treasury bill rate).
Two bonds have identical times to maturity and coupon rates. One is callable at 105, the other at 110. Which should have the higher yield to maturity? Why?
Question: Consider the following $1,000 par value zero-coupon bonds:
Bond | Years until maturity | Yield to maturity |
A | 1 | 5% |
B | 2 | 6% |
C | 3 | 6.5% |
D | 4 | 7% |
According to the expectations hypothesis, what is the market’s expectation of the one year interest rate three years from now?
Find the duration of a 6% coupon bond making annual coupon payments if it has three years until maturity and a yield to maturity of 6%. What is the duration if the yield to maturity is 10%?
You predict that interest rates are about to fall. Which bond will give you the highest capital gain?
a. Low coupon, long-maturity
b. High coupon, short maturity
c. High coupon, long maturity
d. Zero coupon, long maturity
What do you think about this solution?
We value your feedback to improve our textbook solutions.
