A client is reviewing a year-end portfolio report. Since the beginning of the year, market yields...
- A client is reviewing a year-end portfolio report. Since the beginning of the year, market yields have increased slightly. In comparing the beginning-of-the-year price for the bonds selling at a discount from par value to the end-of-year prices, the client observes that all the prices are higher. The client is perplexed since he expected that the price of all bonds should be lower since interest rates increased. Explain to the client why the prices of the bonds in the portfolio selling at discount have increased in value.
Homework Answers
Prices of discount bonds increase with time so that price reaches face/par value at the time of maturity. There is a positive relationship with time for discount bonds and negative relationship with rates for all bonds. For discount bonds, time is the dominant factor hence price increases with time.
Add Answer to:
A client is reviewing a year-end portfolio report. Since the
beginning of the year, market yields...
A firm issues two bonds with 20-year maturities. Both are callable at $1,050. The first bond...
A firm issues two bonds with 20-year maturities. Both are callable at $1,050. The first bond is issued at a deep discount to par with a coupon rate of 4% and a price of $580 to yield 8.4%. The second is issued at par with a coupon rate of 8.9%. What is the yield-to-maturity of the par bond? If you expect rates to fall substantially in the next 2 years, which bond would you prefer to hold? In what sense...
Which of the following statements is CORRECT? a. The market price of a bond will always...
Which of the following statements is CORRECT? a. The market price of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant. b. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. c. The total yield on a bond is derived from dividends plus changes in the price of the bond. d. Bonds are generally regarded...
1. 7-4: Bond Yields Yield to call Seven years ago the Singleton Company issued 22-year bonds...
1. 7-4: Bond Yields Yield to call Seven years ago the Singleton Company issued 22-year bonds with a 12% annual coupon rate at their $1,000 par value. The bonds had a 7% call premium, with 5 years of call protection. Today Singleton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. % Explain why the...
Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs...
Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT? a. Since the bonds have the same YTM, they should all have the same price, and since...
9) Taussig Corp's bonds currently sell for $1.150. They have a 6.75% annual coupon rate 15-year...
9) Taussig Corp's bonds currently sell for $1.150. They have a 6.75% annual coupon rate 15-year maturity, they have been called in 6 years at $1.067.50. Under these conditions, whe rate of return should an investor expect to earn. Original par value is $1000. 10) Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be the...
Investment securities portfolio help to offset credit risk exposure means: a. High-quality securities can be purchased...
Investment securities portfolio help to offset credit risk exposure means: a. High-quality securities can be purchased and held to balance out the risk from loans. b. Their price can never go down. c. They will never default. d. They are protected against interest rates change. 13. Function(s) of a bank's security portfolio is (are) to: a. Increase tax exposure. b. Increase credit risk exposure. c. Provide a back-up source of liquidity. d. All of the above. 14. When interest rates...
1a) You just learned from your sister that you can buy a $1,000 par value bond...
1a) You just learned from your sister that you can buy a $1,000 par value bond for $800. The coupon rate is ten percent (paid annually), and there are ten years left until the bond matures. You should purchase the bond if your require twelve percent return on bonds with this similar risk level. True/False? 1b) A corporate bond with ten years to maturity has an annual coupon rate of six percent. The bond today is selling for $1,000. With...
You want to make a 5-year investment on bonds, and if you buy bonds with longer...
You want to make a 5-year investment on bonds, and if you buy bonds with longer period of maturity, they will be sold at the prevailing market price at the end of the fifth year. All coupons will be reinvested. You forecast that the rates are going to change after you purchase the bonds. Now you have three bonds with same initial YTM to consider: A. 5-year maturity, 6% coupon paid annually, YTM=9% B. 10-year maturity, 8% coupon paid annually,...
Today is April 15, 2016 (a leap year). We have the prices and yields for the...
Today is April 15, 2016 (a leap year). We have the prices and yields for the following three bonds. Assume that all the bonds have face values of $1,000, and pay semi-annual coupons. Bond Coupon Maturity date Bid $ Yield % 1 5.750 Jun/01/2029 146.76 1.74 2 5.750 Jun/01/2033 154.59 1.97 3 3.500 Dec/01/2045 131.48 2.07 Fill in the blanks in the following table. Clearly show all reasoning and calculations in your answers. Bond Clean price $ Last coupon date...
. Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond...
. Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT? a. If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price. b. If interest rates decline, the prices of both bonds...
Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT? a. Since the bonds have the same YTM, they should all have the same price, and since...
9) Taussig Corp's bonds currently sell for $1.150. They have a 6.75% annual coupon rate 15-year maturity, they have been called in 6 years at $1.067.50. Under these conditions, whe rate of return should an investor expect to earn. Original par value is $1000. 10) Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be the...
Investment securities portfolio help to offset credit risk exposure means: a. High-quality securities can be purchased and held to balance out the risk from loans. b. Their price can never go down. c. They will never default. d. They are protected against interest rates change. 13. Function(s) of a bank's security portfolio is (are) to: a. Increase tax exposure. b. Increase credit risk exposure. c. Provide a back-up source of liquidity. d. All of the above. 14. When interest rates...
Most questions answered within 3 hours.
-
In the readings for this topic, the methods for gathering data are
provided. However, there is...
asked 10 minutes ago -
Select from the option list provided the most likely
classification(s) of net assets, if any, that...
asked 10 minutes ago -
Ivanhoe Corp. management is expecting a project to generate
after-tax income of $76,940 in each of...
asked 13 minutes ago -
An unknown compound contains only CC , HH , and OO . Combustion
of 5.30 g5.30...
asked 18 minutes ago -
List 3 viral classes based on their morphology.
What is the difference between lytic and lysogenic...
asked 20 minutes ago -
Myca Corp. has a project with the following cash flows. What is
the value of the...
asked 1 hour ago -
When an object moves through a fluid, the fluid exerts a viscous
force F on the...
asked 3 hours ago -
Why did the observed chemistry of thallium mislead Mendelev to
place the group 13 element (Tl)...
asked 4 hours ago -
A sine wave signal is displayed on the screen of an
oscilloscope. 6 peak-to-peak divisions are...
asked 7 hours ago -
a
1500 kg car accelerates from 0 to 25 m / s in 21.0s. How much...
asked 8 hours ago -
Calculate the molarity of each of the following solutions:
(a) 30.5 g of ethanol (C2H5OH) in...
asked 8 hours ago -
1 Refer to the build-borrow-or-buy framework as a decision tree
for the Adidas company. Identify a...
asked 8 hours ago