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1) A zero coupon bond has a face value of $1,000 and matures in 6 years
1) A zero coupon bond has a face value of $1,000 and matures in 6 years. Investors require? a(n) 7.1% annual return on these bonds. What should be the selling price of the? bond?
2) Ruth Hornsby is looking to invest in a three-year bond that makes semiannual coupon payments at a rate of 4.00 percent. If these bonds have a market price of $850.00, what yield to maturity and effective annual yield can she expect to earn? (Round answer to 2 decimal places, e.g. 15.25%.
Expert Solution
1) We can calculate the selling price of bond by using the following formula:
= -pv(rate,nper,pmt,fv)
Here,
PV = Selling price of bond
Rate = 7.1%
Nper = 6 periods
Pmt = 0
FV = $1,000
Substituting the values in formula:
= -pv(7.1%,6,0,1000)
= $662.62
2) We can calculate the yield to maturity by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield to maturity (semiannual)
Nper = 3*2 = 6 periods (semiannual)
Pmt = Coupon payment = $1,000*4%/2 = $20
PV = $850
FV = $1,000
Substituting the values in formula:
= rate(6,20,-850,1000)
= 4.95%
Yield to maturity = Rate * 2
= 4.95% * 2
= 9.90%
Computation of the effective annual yield:-
Effective annual yield = (1+rate/n)^n-1
= (1+9.90%/2)^2-1
= 1.1015 - 1
= 10.15%
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