Question

1. Consider a bond paying a coupon rate of 12.25% per year semiannually when the market interest rate is only 4.9% per half-year. The bond has six years until maturity.

a.	Find the bond's price today and twelve months from now after the next coupon is paid. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b.	What is the total rate of return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Total rate of return

% per six months

2. A bond with a coupon rate of 6% makes semiannual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on January 30 at 100.219. What is the invoice price of the bond? The coupon period has 182 days. (Do not round intermediate calculations.Round your answer to 2 decimal places.)

3. A newly issued bond pays its coupons once a year. Its coupon rate is 4.3%, its maturity is 10 years, and its yield to maturity is 7.3%.

a.	Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.3% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Holding-period return

%

b.

If you sell the bond after one year when its yield is 6.3%, what taxes will you owe if the tax rate on interest income is 40% and the tax rate on capital gains income is 30%? The bond is subject to original-issue discount (OID) tax treatment. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

c.	What is the after-tax holding-period return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

After-tax holding-period return

%

d.

Find the realized compound yield before taxes for a two-year holding period, assuming that (i) you sell the bond after two years, (ii) the bond yield is 6.3% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 2.3% interest rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Realized compound yield before taxes

%

e.	Use the tax rates in part (b) to compute the after-tax two-year realized compound yield. Remember to take account of OID tax rules. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

After-tax two-year realized compound yield

%

4. You buy a TIPS at issue at par for $1,000. The bond has a 3.2% coupon. Inflation turns out to be 2.2%, 3.2%, and 4.2% over the next 3 years. The total annual coupon income you will receive in year 3 is _________.

$32.00

$33.02

$35.17

$35.20

5. If the price of a $10,000 par Treasury bond is $10,450.00, the quote would be listed in the newspaper as ________.

104:15

104:17

104:16

104:18

6. Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 13.2% would be priced at _________.

$77.57

$83.77

$883.39

$938.09

7. A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 123% of its $1,000 par value. If the last interest payment was made 3 months ago and the coupon rate is 6.60%, the invoice price of the bond will be _________.

$1,230.00

$1,263.00

$1,246.50

$1,197.00

8. A coupon bond that pays interest of $53 annually has a par value of $1,000, matures in 5 years, and is selling today at a $73.50 discount from par value. The current yield on this bond is _________.

5.30%

5.72%

7.76%

5.60%

Please explain in detail all answers.

Answer 1

a. Calculate the current bond price ere The annual coupon rate is 12.25% The semi-annual coupon rate will be 12.25% / 2 (as payments are made semi-annually) Number of years to maturity is 6 years Number of compounding periods will be 6*2 (as payments are made semi-annually) The semi-annual yield to maturity is 4.9%. 1-)Par value Bond price Coupon payment 1+r +)Par value (Coupon rate x Par value)x 1+r 1-(1+4.9%S1 12.25% $1,000 x$1,000 x 4.9% $1,109.19 Calculate the bond price 12 months from now (i.e. one year from now) The number of years to maturity will be 5 years Number of compounding periods will be 5 2 (as payments are made semi-annually) 1-)Par value Bond price Coupon payment 1+r +)Par value (Coupon rate x Par value) x 1+r 1-(1+4.9%) $1,000 12.25% S x$1,000 x 4.9% - S1,095.05

b. Calculate the total rate of return. Coupon rate per periodx Number of periods)-(Current price-Face value) Total rate of return- Current priec / 12.25% x(6x2(S1,109.19-1,000) $1,109.19 = 156.42%