Question

Problem 7-11 Zero-Coupon Bond Price (LG7-4) Calculate the price of a zero-coupon bond that matures in 20 years if the market interest rate is 3.8 percent. Assume semiannual compounding. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Zero-coupon bond price

Answer 1

1.Price of a zero coupon bond=

the PV of its cash flow (ie. Face value recd. At maturity) discounted at the market interest rate

ie. Price of a Zero= Maturity value/(1+r)^n

where , maturity value is normally $ 1000

r= market interest/effective rate per period, here, 3.8%/2=1.9% or 0.019

n= no.of compounding periods,here, 20*2=40 semi-annual compounding periods

so, plugging in the values,

Price of the Zero=1000/(1+0.019)^40=

471.01

ANSWER:

Zero-coupon bond price= $ 471

2.Portfolio return

is the weighted average returns of the individual stocks

$ value of the total portfolio=(6000+5000+8500)= $ 19500

So, wt. of News Corp stocks to Total =6000/19500= 30.77%

wt. of First Data stocks to Total =5000/19500= 25.64%

wt. of Whirlpool stocks to Total =8500/19500= 43.59%

Now, the wt. av. Portfolio return=

(30.77%*8.24%)+(25.64%*-2.59%)+(43.59%*10.13%)=

6.29%

ANSWER:

Portfolio Return= 6.29%

3.. ANSWER: A-- yield spread between bonds of different quality chang eover time.

Yield spread is the difference between yields of comparable bonds belonging to sam eor different industry, in terms of maturity, ratings/quality.

so, it based on the individual yields--which keep changing over time , due to many extraneous issues.

so, yield spread also ,is prone to changes.

4..
Company	No.of shares	Beg.Price/share	End price/sh.	Gain/(Loss) in price/sh.	Div./share	Total return/sh.	Total $ return	Total investment at beg.
1	2	3	4	5=4-3	6	7=5+6	8=7*2	9=2*3
US Bank	300	43.5	43.43	-0.07	2.06	1.99	597	13050
PepsiCo	200	59.08	62.55	3.47	1.16	4.63	926	11816
JDS Uniphase	500	18.88	16.66	-2.22	0	-2.22	-1110	9440
Duke Energy	250	27.45	33.21	5.76	1.26	7.02	1755	6862.5
							2168	41168.5
Return= Holding period return + dividend income
Reading from the above table,
Dollar return= 2168
% return= $ return/Total investment
2168/41168.5=
5.27%
ANSWER:
$ return= 2168
% return= 5.27%

5.Price of the bond is the present value of

its future coupon cash flows+Face value to be recd. At maturity

ie. Price=PV= (Pmt.*(1-(1+r)^-n)/r)+(FV/(1+r)^n)

where,

Pv of cash flows is the price -- to be found out--??

Pmt.= the periodic coupon cash flow,ie.1000*3.8%/2= $ 19 , semi-annual

r= semi-annual market interest rate, ie. 6.8%/2= 3.4% or 0.034

n= no.of semi-annual compounding periods, ie. 15 yrs.*2= 30

FV= face value , $ 1000

So, plugging in the values, in the formula,

Price=PV= (19*(1-(1+0.034)^-30)/0.034)+(1000/(1+0.034)^30)

720.63

So, Bond price= $ 721

It is a discount bond.

Price < Par

as YTM or market interest rate > Coupon rate