FNCE10001 Chapter Notes - Chapter 6: United States Treasury Security, Notional Amount, Zero-Coupon Bond

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orangemole587

25 May 2018

School

University of Melbourne

Department

Finance

Course

FNCE10001

Professor

Asjeet Lamba

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Bond = security sold by gov and corporations to raise money from investors in exchange for

promised future payments

Bond certificate = indicates amounts and dates of all payments to be made

Maturity date = final repayment date

Term = time remaining until repayment date

Paid periodically until maturity date

Coupons = promised interest payments of a bond

Principal/face value = notional amount used to calculate interest payments

Coupon rate = amount of each coupon payment

CPN = Coupon Rate x Face Value / No. of Coupon Payments per year

Does not make coupon payments

Only cash payment investor receives is face value of the bond on the maturity date

Eg. Treasury bills

Price of zero

coupon bond < face value

Trade at a discount

Zero

coupon bond (pure discount bond):

Yield to maturity (YTM) = IRR of an investment in a bond = discount rate that sets present value of

promised bond payments equal to current market price of the bond

YTM

= (FV/P)

1/n

= YTM

Pay investors face value at maturity

Regular coupon interest payments

Eg. Treasury notes, treasury bonds

Coupon bonds:

Bond Cash Flows, Prices and Yields

Thursday, 16 March 2017 1:18 PM

Principles of Finance Page 1

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Document Summary

Bond = security sold by gov and corporations to raise money from investors in exchange for promised future payments. Bond certificate = indicates amounts and dates of all payments to be made. Coupons = promised interest payments of a bond. Principal/face value = notional amount used to calculate interest payments. Coupon rate = amount of each coupon payment. Cpn = coupon rate x face value / no. of coupon payments per year. Only cash payment investor receives is face value of the bond on the maturity date. Yield to maturity (ytm) = irr of an investment in a bond = discount rate that sets present value of promised bond payments equal to current market price of the bond. Ytmn = (fv/p)1/n - 1 rn = ytmn. Par price equal to than face value cpn = ytm. Premium price greater than face value cpn > ytm. If ytm does not change, irr = ytm even if sold early.

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?

Assume that the current market rate is 3 percent. Calculate the returns anf provide all relevant factors to compar between the three alternative below :
a) A 4 year gov bond initially sold to the public on the same date last year (the 1st coupon paid yesterday). Face value of the bond = 1,000 and its coupon rate is 4 percent,while the current price of the bond is at 880

b)A 3 year zero coupon gov bond initially sold to the public today. Face value is 1,000 and the bond is sold at 840

c) An insurance program with 3 yrs term to maturity. The premium payment is 860 for 2 yrs, the sum insured is 1000 , the cash return is 2 percent of the sum insured at the end of each year for 3 years and the extra cash return on the maturity date is 110 percent of the sum insured

**please show me the calculation

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?

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FNCE10001 Chapter Notes - Chapter 6: United States Treasury Security, Notional Amount, Zero-Coupon Bond

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