Mid Term – October 2014 Bond Pricing Qu 1: Time to Maturity Zero Coupon Rate Discount Factor 1 5% 2 6% 3 7% 4 8% 5 9% Give the formula for the discount factor in terms of the zero coupon rate. Use the formula to fill in the discount factors in the table above (you can write the formula or using excel calculate the numerical value). Assume that the government wishes to issue a new 5 year bond priced at 100 (called a par coupon bond as it is priced at par i.e. the price is the same as the face
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i.e.‚ of a zero coupon bond which pays $1 in half-year n. In the next two columns there are the cash flows of two bonds‚ A and B. Essentially‚ bond A pays a 20% semi-annual coupon and bond B pays a 10% semi-annual coupon. Both bonds mature in 2.5 years‚ when each also pays its principal of 100. Assume semi-annual compounding. Half Year 1 2 3 4 5 n Bond A Bond B .95 .91 .87 .80 .70 10 10 10 10 110 5 5 5 5 105 A. Calculate the price of each bond assuming there
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The corporate bond market is “thin” compared to the market for money market securities or corporate stocks. a) true Prices in the corporate bond market tend to be less volatile than prices of securities sold in markets with greater trading volumes. a) False All other things being equal‚ a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity. a) True If investors believe inflation will be increasing in the
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Case: Corning Inc.‚ Zero coupon convertible Bonds Cornhill needs funds to the order of $ 3.6 billion in cash to complete the acquisition of Pirelli. The company currently is planning to come up with an equity issue to raise $ 2.1375 billion at $ 71.25 per share. The remaining part of the fund requirements is furbished using zero coupon convertible debentures due in 2015‚ priced at $ 741.923 per $ 1‚000 principal amount. This offering price yields 2% p.a. compounded semi-annually. Corning is raising
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4.25 (a) the six-month zero-coupon bond rate is calculated as follows: Rm=[m*(FV-PV)]/PV Rm=[2*(100-98)]/98=0.0482 Then this is converted into a continuously compounding rate: Rc=m*ln(1+Rm/m) Rc=2*ln(1+0.0482/2)=0.04763 The 1 year zero-coupon bond rate is calculated as follows: Rm=[1*(100-95)]/95=0.05263 Then this is converted into a continuously compounding rate: Rc=1*ln(1+0.05263/1)=0.05129 The 1.5 year zero-coupon bond rate is calculated as follows:
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Repellant Co’s 8 per cent coupon bonds one year ago for $1030. These bonds make annual payments and mature six years from now. Suppose you decide to sell your bonds today ‚when the required return on the bonds is 7 per cent .If the inflation rate was 4.2 per cent over the past year ‚what was your total real return on investment ? 3) A stock has had returns of 3 per cent ‚38 per cent ‚ 21 per cent ‚-15 per cent ‚29 per cent and -13 percent over the last six years. What are the arithmetic and geometric
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Online Coupons: Ideal for Wise Spenders When the economy is in a bad shape‚ people learned to control their spending and budget their money wisely. This newly developed habit includes searching for great bargains and deals. This has led to people flooding the different thrift shops and bargain stores in the country. Others tend to buy on second hand shops for items that do not necessarily need to be brand new. Other items and services that cannot be purchased in thrift shops are purchased through
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Bonds and Their Valuation After reading this chapter‚ students should be able to: • List the four main classifications of bonds and differentiate among them. • Identify the key characteristics common to all bonds. • Calculate the value of a bond with annual or semiannual interest payments. • Explain why the market value of an outstanding fixed-rate bond will fall when interest rates rise on new bonds of equal risk‚ or vice versa. • Calculate the current yield
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Introduction A coupon is a ticket or document that can be exchanged for a financial discount or rebate when purchasing a product. This coupon is offered by McDonald’s fast food restaurant. The coupon give shoppers one more reason to buy from you. The restaurant’s coupon settings are flexible‚ it is robust‚ and it is really easy to use‚ so customers can save and you can earn – it’s a win-win. Purpose The purpose of coupon promotion tools is for attract customer can use the coupon and visit their
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