Below is a list of prices for zero-coupon bonds of various maturities.
Maturity (Years) Price of $1,000 Par Bond (Zero-Coupon) 1 $988.50 2 891.00 3 844.90
a. An 5.2% coupon $1,000 par bond pays an annual coupon and will mature in 3 years. What should the yield to maturity on the bond be? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Yield to maturity %
b. If at the end of the first year the yield curve flattens out at 6.2%, what will be the 1-year holding-period return on the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Holding-period return %
| Below is a list of prices for zero-coupon bonds of various maturities. |
| Maturity (Years) | Price of $1,000 Par Bond (Zero-Coupon) |
| 1 | $988.50 |
| 2 | 891.00 |
| 3 | 844.90 |
| a. | An 5.2% coupon $1,000 par bond pays an annual coupon and will mature in 3 years. What should the yield to maturity on the bond be? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| Yield to maturity | % |
| b. | If at the end of the first year the yield curve flattens out at 6.2%, what will be the 1-year holding-period return on the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| Holding-period return | % |
Related questions
| A newly issued bond pays its coupons once annually. Its coupon rate is 6.7%, its maturity is 20 years, and its yield to maturity is 7.5%. |
| a. | Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 6.5% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| Holding-period return | % |
| b. | If you sell the bond after 1 year, what taxes will you owe if the tax rate on interest income is 40% and the tax rate on capital gains income is 30%? The bond is subject to original-issue discount tax treatment. (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "$" sign in your response.) |
| Tax on interest income | $ |
| Tax on capital gain | $ |
| Total taxes | $ |
| c. | What is the after-tax holding-period return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| After-tax holding-period return | % |
| d. | Find the realized compound yield before taxes for a 2-year holding period, assuming that (1) you sell the bond after 2 years, (2) the bond yield is 6.5% at the end of the second year, and (3) the coupon can be reinvested for 1 year at a 3% interest rate. (Do not round intermediate calculations.Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| Realized compound yield before taxes | % |
| e. | Use the tax rates in part (b) to compute the after-tax 2-year realized compound yield. Remember to take account of OID tax rules. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| After-tax 2-year realized compound yield | % |
| A 12-year maturity zero-coupon bond selling at a yield to maturity of 7% (effective annual yield) has convexity of 151.5 and modified duration of 11.06 years. A 30-year maturity 7% coupon bond making annual coupon payments also selling at a yield to maturity of 7% has nearly identical durationâ11.04 yearsâbut considerably higher convexity of 234.6. |
| a. | Suppose the yield to maturity on both bonds increases to 8%. What will be the actual percentage capital loss/gain on each bond? What percentage capital loss/gain would be predicted by the duration-with-convexity rule? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "%" sign in your response.) | |
| Zero Coupon Bond | Coupon Bond | |
| Actual : gain/loss | % | % |
| Predicted : loss/gain | % | % |
| b. | Suppose the yield to maturity on both bonds decreases to 6%. What will be the actual percentage capital loss/gain on each bond? What percentage capital loss/gain would be predicted by the duration-with-convexity rule? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "%" sign in your response.) | |
| Zero Coupon Bond | Coupon Bond | |
| Actual : loss/gain | % | % |
| Predicted : loss/gain | % | % |
