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In your own words explain the difference between stocks and bonds. Make sure to mention the benefits and downsides of each of these.

If you had a choice to buy $1000 worth of stocks or bonds, which one will you choose? 

Suppose you decided to buy a $1000 bond that pays a 5% yearly interest rate and mature in 25 years. A year later you find yourself in a situation where you can really use some money so you decide to sell your bonds. If current interest rate is 3%, how much is your bond worth now?

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Yusra Anees
Yusra AneesLv10
28 Sep 2019

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Related questions

Question 1.

a. What is the difference between interest rates and returns on a bond? Is the RET equal to the interest rate? Why or Why not?

b. What would be the rate of return on a coupon bond bought at face value of $1000 today( with a coupon rate of 15%) and sold for $1200 one year later ?

c. What is the method to calculate the rate of Capital Gain (g)? Is there a capital gain or loss in the above cae? How much?

Question 2.

Explain why you would be more or less willing to buy long-term Government bonds under the following scenarios: Use a demand and supply analysis for bonds, with a given initial equilibrium in the bonds market. ( Diagram necessary)

a.Trading in these bonds increases, making them easier to sell.

b.Relative risk of these bonds compared to other types falls

c.Suppose government has a surplus

Question 3.( Diagram nesscesary)

a. What is the distinction between Real and Nominal Interest rates?

b. Suppose we have an equilibrium in the bonds market with a given expected inflation (he). If inflation rate increases, What will happen to the demand and supply of bonds? Would you be able to say for sure (i.e. with certainty) what will happen to the price of bonds and what will be the quantity bought and sold? Why or why not?

This assignment requires the following knowledge: For k different events, if the probability that each of them happens is p (0 < p < 1) and all events happen independently, the probability that all events happen together is p^k.
1. Five firms, namely A, B, C, D and E, issue discounted bonds with face value $1,000 and maturity 5 years in the market. All firms are pretty risky and each of them has a chance of 0.5 of collapse during the five years (thus bankrupted and can not pay back the bond accordingly). The bonds are all sold at an interest rate of 50% (the value is not surprising due to the extremely high risk of default).
(1) What is the present value of the bond given the interest rate, the face value and the maturity? Hint: we temporarily do not consider the issue of default.
(2) Say now you buy one bond from each of the five firms, what is the total amount you lend out today? Eventually only one firm does not fail and pays back the bond, what is the money you collect back 5 years later? You gain or loss in this case? If more than one firm pays back the bond, will you get more money back?
(3) What is the chance (probability) that you get nothing back assuming that firms fail independently? Together with the answer in (2), is it a good deal to buy one bond from each of the five firms?
(4) Repeat (2) and (3) with the only difference that now you buy 5 bonds from a single firm.
(5) Now we assume that the five firms all have similar businesses in Greece (and those are their only businesses), therefore, all firm fail together if the economy in Greece fails. Will you answer in (3) change?

When a government or corporation sells bonds to raise money, it can do so in one of two ways. It can target a certain amount to raise or it can target a certain amount to pay back at the end of the bond (this is simplified for the purpose of the problem). Let's examine the two approaches. Suppose the State of Maryland would like to raise money to help pay for the new Purple Line light rail which will connect New Carrollton with Bethesda and is currently planned to run down Campus Drive through campus. Answer the following questions assuming the market rate for zero-coupon bonds that Maryland must pay is 4% per year and it does not pay the bond until the end of the term.

(a) If Maryland seeks to raise $200,000,000 today, how much will it have to pay back in ten years?

(b) Maryland's state economists look at tax and revenue projections and say that they can only afford to pay back $270,000,000 in ten years. Given that, how much money can they raise today?

You would like to save money to buy a new car that costs $10,000, but currently, only have $8,000 and you know you won't have any further excess savings to contribute more to it. You have available to you a fairly good savings account which pays continuously compounded 5% interest rate. Recall that:

X(t + n) = Xt e^(rn)

Using natural logarithms, solve for n to determine how long it will take for the balance of your savings to reach $10,000.

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