prashantsahni

If a 15-year, $1,000 U.S. zero-coupon bond is priced to yield 10%, what is its market price?

A) $23.50.

B) $231.38.

C) $239.39.

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N = 30; I/Y = 5; PMT = 0; FV = 1,000; CPT → PV = 231.38.

prashantsahni

A 15-year zero coupon bond that has a par value of $1,000 and a required return of 8% would be priced at what value assuming annual compounding periods:

A) $315.

B) $464.

C) $308.

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N = 15 FV = 1,000
I = 8
PMT = 0
PV = ?
PV = 315.24

prashantsahni

Janet Preen is considering buying a 10-year zero-coupon bond that has a $1,000 face value and is priced to yield 7.25% (semi-annual compounding). What price will Janet pay for the bond?

A) $490.58.

B) $496.62.

C) $1,000.00.

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N = 10 × 2 = 20; I/Y = 7.25/2 = 3.625; PMT = 0; FV = 1,000; Compute PV = 490.58 or $1,000/(1.03625)20 = $490.58.

prashantsahni

If the required rate of return is 12%, what is the value of a zero coupon bond with a face value of $1,000 that matures in 20 years? Assume an annual compounding period.

A) $175.30.

B) $103.67.

C) $99.33.

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I = 12
PMT = 0
FV = 1,000
N = 20
PV = ?
PV = 103.67

prashantsahni

A Treasury bill has a $10,000 face value and matures in one year. If the current yield to maturity on similar Treasury bills is 4.1% annually, what would an investor be willing to pay now for the T-bill?

A) $9,799.12.

B) $9,899.05.

C) $9,606.15.

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The investor would pay the present value of the $10,000 one year away at a discount rate of 4.1%. To value the T-bill, enter FV = $10,000; N = 1; PMT = 0; I/Y = 4.1%; CPT → PV = -$9,606.15.

prashantsahni

The value of a 10-year zero-coupon bond with a $1,000 maturity value, compounded semiannually, and has an 8% discount rate is closest to:

A) $200.00.

B) $456.39.

C) $463.19.

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V = (maturity value)/(1 + i)number of years x 2 = $1,000/(1.04)10 x 2 = $1,000/2.1911 = $456.39
or
n = 20, i = 4, FV = 1,000, compute PV = 456.39.

prashantsahni

Anne Warner wants to buy zero-coupon bonds in order to protect herself from reinvestment risk. She plans to hold the bonds for fifteen years and requires a rate of return of 9.5%. Fifteen-year Treasuries are currently yielding 4.5%. If interest is compounded semiannually, the price Warner is willing to pay for each $1,000 par value zero-coupon bond is closest to:

A) $256.

B) $498.

C) $249.

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Note that because the question asks for how much Warner is willing to pay, we will want to use her required rate of return in the calculation.
N = 15 × 2 = 30, FV = $1,000, I/Y = 9.5 / 2 = 4.75, PMT = 0; CPT → PV = -248.53.
The difference between the bond’s price of $249 that Warner would be willing to pay and the par value of $1,000 reflects the amount of interest she would earn over the fifteen year horizon.

prashantsahni

Anne Warner wants to buy zero-coupon bonds in order to protect herself from reinvestment risk. She plans to hold the bonds for fifteen years and requires a rate of return of 9.5%. Fifteen-year Treasuries are currently yielding 4.5%. If interest is compounded semiannually, the price Warner is willing to pay for each $1,000 par value zero-coupon bond is closest to:

A) $256.

B) $498.

C) $249.

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Note that because the question asks for how much Warner is willing to pay, we will want to use her required rate of return in the calculation.
N = 15 × 2 = 30, FV = $1,000, I/Y = 9.5 / 2 = 4.75, PMT = 0; CPT → PV = -248.53.
The difference between the bond’s price of $249 that Warner would be willing to pay and the par value of $1,000 reflects the amount of interest she would earn over the fifteen year horizon.

prashantsahni

Randy Harris is contemplating whether to add a bond to his portfolio. It is a semiannual, 6.5% bond with 7 years to maturity. He is concerned about the change in value due to interest rate fluctuations and would like to know the bond’s value given various scenarios. At a yield to maturity of 7.5% or 5.0%, the bond’s fair value is closest to:

7.5%

5.0%

A) 974.03 1,052.36

B) 946.30 1,087.68

C) 1,032.67 959.43

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Given a YTM of 7.5%, calculate the value of the bond as follows:
N = 14; I/Y = 7.5/2 = 3.75%; PMT = 32.50; FV = 1,000; CPT → PV = 946.30
Given a YTM of 5.0%, calculate the value of the bond as follows:
N = 14; I/Y = 5/2 = 2.5%; PMT = 32.50; FV = 1,000; CPT → PV = 1,087.68

prashantsahni

Consider a bond that pays an annual coupon of 5% and that has three years remaining until maturity. Suppose the term structure of interest rates is flat at 6%. How much does the bond price change if the term structure of interest rates shifts down by 1% instantaneously?

A) -2.67.

B) 0.00.

C) 2.67.

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This value is computed as follows: Bond Price Change = New Price – Old Price = 100 – (5/1.06 + 5/1.062 + 105/1.063) = 2.67.
-2.67 is the correct value but the wrong sign. The value 0.00 is incorrect because the bond price is not insensitive to interest rate changes.