Question

Question #7: Holding Period Return (20 Points) Assume that you have a one-year investment horizon and are trying to choose among two bonds. Both have the same default risk and mature in 6 years. The first is a zero-coupon bond that pays $1000 at maturity. The second is a $1000 par value coupon bond that has a coupon rate of 6% and makes an annual coupon payment. (a) If the YTM is equal to 3.6% what is the current prices for each of the bonds? [3 Points each; 6 Points Total] (b) Suppose that the YTM next year falls to 3.2%. Calculate the one year holding period return for each of the bonds. (Hint: One year has passed since you initially purchased the bond] [7 Points each; 14 Points Total]

Answer 1

value of bond. at the and of year, 7.60x, punt(3.61, 5) + 1000 (puf @z-7), 5) -.(60 x 4.5023) f(troo x 0.836-) .1108.138 • 108.135 i Holcking pestod 1. value at year, - value at year Interst Refaen e wlе се чегох, Cwm-66- 1108.135) + 60|100 112.7-66 THPR - 7.05%. Coutor praf prevent raue value Annuity factor... prenent present Lpk punt = Has to calculate 5 en calculator and then press GT. tere- 3.6% rougth 5 = No. of years.

-Ansoek futeline Defired nescoer Valuation of Ponda. Nalue of bond: Descouted value of all cash Infliccus at the yield (yern) CInterest) on year Cashflows, pre@3-62 pr. 1 (1000xbi): 60 . 0.965. 57.5 60 0.932 55.92 53-94 60 : 0.895 60 0.866 50-28 60 60 D.809 : uf.54 1000 0-808. Sos cpatero pae). 1127-66 52.08 (Approx 1. Value of bond 1127.6.6. 1000 x 0.809 : value of Zero Coupon bond... early Interest Receipts. (There colll be Do