Question 1

Suppose that there are three zero coupon bonds with maturity date 1 year, 2 year and 3 year respectively. The current price of the 1 year, 2 year and three year bonds respectively are $826.45, $718.18 and $640.66 respectively. The yield to maturity of the first year bond is:

Accepted Answer

The yield to maturity (YTM) for a zero-coupon bond is calculated using the formula: YTM = [(Face Value / Present Value)^(1/n)] - 1. Assuming a face value of $1000, the YTM for the 1-year bond is [(1000 / 826.45)^(1/1)] - 1 = 0.21 or 21%.

Question 2

Show that a firm with earnings of $10,000 a year in perpetuity would be better off paying all earnings in dividends rather than investing 25% of its earnings (also in perpetuity) in projects earning 14% if its discount rate is 15%.

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Question 3

Given the following set of spot rates:
 Calculate the 1-year forward rates over each of the next 3 years.

Accepted Answer

The answer of Given the following set of spot rates:
...

Question 4

Given the opportunity to invest in one of the three bonds listed below, which would you purchase? Assume an interest rate of 7%.

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Question 5

In the above example, the price of the bond is

Accepted Answer

The price of the bond is calculated by first finding the present value of the promised future cash flows, which is done by discounting them at the given yield to maturity. Using the formula, we get:

PV = 50/(1+0.08) + 50/(1+0.08)^2 + 1050/(1+0.08)^3

PV = $44.77 + $41.38 + $1039.05

PV = $1125.20

Therefore, the price of the bond is $1125.20, which is option A).

Question 6

In the above problem, the yield to maturity of the second year bond is

Accepted Answer

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Question 7

A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms. How is this possible? Does this violate our basic principle of stock valuation? Explain.

Accepted Answer

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Question 8

Calculate the YTM on a bond priced at $1,036 which has 2 years to maturity, a 10% coupon rate, and a return of $1,000 at maturity.

Accepted Answer

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Quiz 6: How to Value Bonds and Stocks