AFM273 Chapter Notes - Chapter 6: Spot Contract, Ytn, Cash Flow

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OC2146671

13 Oct 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM273

Professor

Xuyang Ma

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Document Summary

Face value (principle): amount used to compute coupon payments: repaid at maturity, usually a denomination of increments. Zero-coupon bonds: does not make coupon payments, treasury bills. Irr of the bond: (cid:1839)= (cid:4672)(cid:4673)(cid:3117) (cid:883, (cid:1870)(cid:3041)=(cid:1839)(cid:3041) If you purchased the bond for . 14 and sold it for . 53 five years later, the irr is. Discounts and premiums: coupon bonds may trade at, par (price equal to their face value, coupon rate is equal to yield to maturity, discount (price less than the face value) Investor earns a return on both receiving the coupons and receiving a face value that exceeds the price paid for the bond: yield to maturity exceeds coupon rate, premium (price greater than their face value) Investor"s return from the coupons is diminished by receiving a face value less than the price paid: yield to maturity is less than the coupon rate.

Related Questions

QUESTION 1 The largest investors in corporate bonds are life insurance companies and pension funds. True False 5 points QUESTION 2 Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market. True False 5 points QUESTION 3 The value (or price) of a bond is the present value of its expected future cash flows. True False 5 points QUESTION 4 Bond prices decline when the interest rate decreases. True False 5 points QUESTION 5 The face or par value for bonds is the amount paid to bondholders at maturity and is usually equal to $1,000. True False 5 points QUESTION 6 The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. True False 5 points QUESTION 7 Zero coupon bonds have no coupon payments so they sell for more than their par value. True False 5 points QUESTION 8 Interest rate risk is the risk that bond prices will fluctuate when the interest rate changes. True False 5 points QUESTION 9 US Treasury securities are considered risky investments because the coupon payments are unpredictable. True False 5 points QUESTION 10 Bonds are very difficult to value because their future cash flows are very difficult to predict. True False 5 points QUESTION 11 If the bond's coupon rate is equal to the market rate then the bond will sell at a price equal to its face value greater than its face value less than its face value equal to its foreign currency value, e.g., its price in British pounds 5 points QUESTION 12 When calculating the price of a bond that pays a semiannual coupon one needs to use double the number of years until maturity for the number of payments use half the annual coupon payment use half the annual rate of return as the discount rate all of the above 5 points QUESTION 13 The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments more than the price of the bond equal to zero equal to the price of the bond less than the price of the bond 5 points QUESTION 14 Which one of the following statements is true? All else equal long-term bonds have lower price volatility than short-term bonds. There is an inverse relation between bond prices and market interest rates. All else equal short-term bonds are more risky than long-term bonds. All else equal US government bonds are more risky than corporate bonds. 5 points QUESTION 15 An investor owns a 10-year US government bond with a 9 percent coupon rate. If the yield-to-maturity on the bond is 8 percent then this bond is selling for its par value. a discount. a premium. its face value. 5 points QUESTION 16 BA Corp is issuing a 10-year bond with a coupon rate of 8 percent and a par value of $1,000. The market interest rate on similar bonds is currently 6 percent. If the coupon payments are made annually, what is the value of this bond? 5 points QUESTION 17 Knight, Inc. has issued a 3-year bond with a $1,000 par value and an annual coupon rate of 6 percent. The current market rate of interest is 5 percent. What is the value of this bond if the coupon payments are made semiannually? 5 points QUESTION 18 Diane Carter is interested in buying a 5-year zero coupon bond with a face value of $5,000. If the market interest rate on these types of bonds is currently 9 percent, what is the current price of this bond? 5 points QUESTION 19 Rudy Sandberg wants to invest in 4-year bonds that are currently priced at $933.76. The bonds have a coupon rate of 6 percent and annual coupon payments. If the par value of the bonds is $1,000, what is the bond's yield-to-maturity? 5 points QUESTION 20 You own a 5-year bond with a face value of $1,000 and a coupon rate of 5 percent with annual payments. The bond is currently worth $810.46. If market interest rates remain unchanged, what will be the value of the bond next year when there are 4 years left until maturity?

Hi There

Can you please help with the below question. Thank you in advance.

Ms. Alumm is the portfolio manager for a large insurance company. She is considering investing $1 million to purchase the bonds of Patriot Enterprises, Inc.
[A] All of Patriot's bonds have market prices that imply a yield to maturity of 8% "bond equivalent yield" (that is, 4% every 6-month period).1 Each Patriot bond is described here, based on a
$1,000 face value (par value), which is the promised payment at maturity.

. Bond A has five years until maturity and pays a 9% coupon yield ($45 every 6 months on a $1,000 face value bond).
. Bond B has ten years until maturity, pays an 8% coupon yield ($40 semiannual payments), and is being offered in a private placement at par.
. Bond C is a zero-coupon bond that pays no explicit interest, but will pay the face amount of $1,000 per bond at maturity in ten years.
1. At what price should each bond sell currently?

[B] Ms. Alumm realizes that in addition to determining the current prices of these bonds, she would also like to know how these prices might respond to changing interest rates once her company has purchased them.
2. After purchasing the bonds at an 8% bond-equivalent yield, what would happen to the price of each bond, and how much money would the company make if market yields on Patriot bonds fall to 6%?. . . rise to 10%?

[C] As an alternative, Ms. Alumm has been invited to invest $1 million in a private placement of a 10-year Eurobond2 of a second firm, Nationaliste, S.A. Nationaliste bonds are similar in risk to "Bond B" above: they promise an 8% coupon yield for 10 years, but coupons are paid annually, not semiannually. The Nationaliste bonds are priced at a 1% discount from par, or $990 per $1,000 face value.
3. What yield to maturity is implied by the Nationaliste Eurobond? Compare this yield to the 8% "bondequivalent yield" of the Patriot semiannual coupon bond (Bond B) above. What should Ms. Alumm do?

beigehound466

Which of the following statements is CORRECT?
a. Assume that two bonds have equal maturities and are of equalrisk, but one bond sells at par while the other sells at a premiumabove par. The premium bond must have a lower current yield and ahigher capital gains yield than the par bond.
b. A bondâs current yield must always be either equal to its yieldto maturity or between its yield to maturity and its couponrate.
c. If a bond sells at par, then its current yield will be less thanits yield to maturity.
d. If a bond sells for less than par, then its yield to maturity isless than its coupon rate.
e. A discount bondâs price declines each year until it matures,when its value equals its par value.

redmammoth172

AFM273 Chapter Notes - Chapter 6: Spot Contract, Ytn, Cash Flow

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