A young engineering company is a subcontractor in an effort to develop technology that will reliably detect and respond to release of anuclear weapon. The company is in need of additional funding and issues a series of $1,000 face value bonds that pay a nominal annualrate of 8% with quarterly payments. The bond matures in 6 years.Part aYour answer is correct.If you buy one bond for $905 and keep it until maturity, what is your effective annual rate of return?Click here to access the TVM Factor Table calculator.10.52 %Carry all interim calculations to 5 decimal places and then round your final answer to 2 decimal places. The tolerance is ±0.02. If you buy one bond for $905, but need to sell it immediately after the 20th interest payment for $905, what is your effectiveannual rate of return?Click here to access the TVM Factor Table calculator.%Carry all interim calculations to 5 decimal places and then round your final answer to 2 decimal places. The tolerance is ±0.02.

To calculate the effective annual rate of return, we need to determine the total cash flows received…

Answered: If you buy one bond for $905, but need…

If you buy one bond for $905, but need to sell it immediately after the 20th interest payment for $905, what is your effective annual rate of return?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A company is considering starting a new product line. The new product line requires the installation ofnew machines and equipment. For this purpose, company wants to borrow money by issuing bonds of$10,000 for 12-year period. The interest on these bonds is to be paid at a rate of 10% per year. Computethe amount of interest to be paid to bondholders over 12-year period:a) if the simple interest is charged. b) If the interest is compounded annually.
A young engineering company is a subcontractor in an effort to develop technology that will reliably detect and respond to release of a nuclear weapon. The company is in need of additional funding and issues a series of $1,000 face value bonds that pay a nominal annual rate of 6% with quarterly payments. The bond matures in 6 years. If you buy one bond for $820 and keep it until maturity, what is your effective annual rate of return? Carry all interim calculations to 5 decimal places and then round your final answer to 2 decimal places.
A young engineering company is a subcontractor in an effort to develop technology that will reliably detect and respond to release of a nuclear weapon. The company is in need of additional funding and issues a series of $1,000 face value bonds that pay a nominal annual rate of 6% with quarterly payments. The bond matures in 6 years. If you buy one bond for $820, but need to sell it immediately after the 16th interest payment for $820, what is your effective annual rate of return? If you buy one bond for $820, but need to sell it immediately after the 16th interest payment for $820, what is your effective annual rate of return?
A man bought a 5% tax-free municipal bond. It cost $1000 and will pay $50 interest each year for 20 years. At maturity the bond returns the original $1000. (a) If there is 2% annual inflation, what real rate of return will the investor receive? (b) What ethical questions are linked to governments issuing negative interest rate bonds?
A company must make a payment of $2500 in 5 years. Four-year zero coupon bonds and seven-year zero coupon bonds are available for investment. These bonds could be purchased in any quantity and the yield rate is 3% effective. Let A and B be the face values of the 4-year and 7-year zero-coupon bonds, respectively, that are purchased to satisfy full immunization against any changes in interest rates. Find A. Possible Answers A 1262 1431 C 1618 D 1725 E 1962
Corral Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 8.5 percent, payable annually. The one-year interest rate is 8.5 percent. Next year, there is a 40 percent probability that interest rates will increase to 10 percent, and there is a 60 percent probability that they will fall to 6 percent. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon. a) 8.12% b) 8.77% c) 8.59% d) 8.35%
Cardinal Mania is financing a new investment project by issuing five-year bonds. Each bond has the face value of $1,000, and each bond pays out a $25 coupon each year (annual coupon.) Cardinal Mania plans to issue 1000 such bonds to raise the required funding of $870,000. Please answer the following questions: A. Calculate the yield to maturity and the current yield of this bond. B. Your tax rate is 20%, and the bond from Cardinal Mania is not tax-exempt. Suppose you can also invest in a five-year tax-exempt municipal bond with a yield of 3%. Would you buy the Cardinal Mania bond or the municipal bond? C. What would the holding period return rate be if you hold the Cardinal Mania bond for two years before selling it at par?
A client deposits 150,000 in a bank, with the bank agreeing to pay 6% annual effective for three years. The client indicates that one third of the account balance will be withdrawn at the end of the first year and half of the account balance will be withdrawn at the end of the second year. The bank can invest in either one year or three year zero coupon bonds. The one year bonds yield 7% and the three year bonds yield 10%. Develop an investment program based on immunization.
BroadStreet Bank has just been given a $10,000,000, 5 year CD deposit by the local municipality. The bank has agreed to pay 8%, compounded annually on this deposit. The bank wishes to choose one debt investment to cover this deposit, so that they have earnings from this investment to just cover the interest and CD principal when it comes due in 5 years. They are looking at the following 3 possibilities for investment: Bond Maturity Coupon YTM Duration1 5 0.00% 8.00% 5.002 6 7.90% 8.00% 5.003 7 17.15% 8.00% 5.00 • Show that each of three investment will cover the future payout required by the CD, even if market rates increase or drop by ½ % by the end of 5 years
Suppose the government decides to issue a new savings bond that is guaranteed to double in value if you hold it for 18 years. Assume you purchase a bond that costs $100. a. What is the exact rate of return you would earn if you held the bond for 18 years until it doubled in value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If you purchased the bond for $100 in 2020 at the then current interest rate of .22 percent year, how much would the bond be worth in 2028? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. In 2028, instead of cashing in the bond for its then current value, you decide to hold the bond until it doubles in face value in 2038. What annual rate of return will you earn over the last 10 years?
Suppose the government decides to issue a new savings bond that is guaranteed to double in value if you hold it for 22 years. Assume you purchase a bond that costs $50. a. What is the exact rate of return you would earn if you held the bond for 22 years until it doubled in value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If you purchased the bond for $50 in 2017 at the then current interest rate of .24 percent year, how much would the bond be worth in 2028? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. In 2028, instead of cashing in the bond for its then current value, you decide to hold the bond until it doubles in face value in 2039. What annual rate of return will you earn over the last 11 years? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
A few years ago, Zabar Technology issued an annual bond that has a face value equal to $1,000 and pays investors $40 interest semiannually. The bond has four years remaining until maturity. If an investor requires a 5% rate of return to invest in this bond, what is the maximum price he or she should be willing to pay to purchase the bond today? O $1,106.38 O $964.54 O $1,107.55 $935.37

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