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Musya8 [376]
3 years ago
6

. Suppose you buy a five-year zero-coupon Treasury bond for $800 per $1000 face value. Answer the following questions: (a) What

is the yield to maturity (annual compounding) on the bond? (b) Assume the yield to maturity on comparable zeros increases to 7% immediately after purchasing the bond and remains there. Calculate your annual return (holding period yield) if you sell the bond after one year. (c) Assume yields to maturity on comparable bonds remain at 7%, calculate your annual return if you sell the bond after two years. (d) Suppose after 3 years, the yield to maturity
Business
1 answer:
matrenka [14]3 years ago
7 0

Answer:

(a) What is the yield to maturity (annual compounding) on the bond?

Yield to maturity (YTM) = (face value / market price)¹/ⁿ - 1

  • face value = $1,000
  • market price = $800
  • n = 5

YTM = ($1,000 / $800)⁰°² - 1 =  0.0456 or 4.56%

(b) Assume the yield to maturity on comparable zeros increases to 7% immediately after purchasing the bond and remains there. Calculate your annual return (holding period yield) if you sell the bond after one year.

holding period yield = (end of period value - initial value) / initial value

initial value = $800

end of period value = ?

to determine the end of period value we must solve:

7% = ($1,000 / ?)⁰°²⁵ - 1

1.07 = ($1,000 / ?)⁰°²⁵

1.07⁴ = $1,000 / ?

? = $1,000 / 1.3108 = $762.90

holding period yield = ($762.90 - $800) / $800 = -4.64%

(c) Assume yields to maturity on comparable bonds remain at 7%, calculate your annual return if you sell the bond after two years.

1.07³ = $1,000 / ?

? = $1,000 / 1.225 = $816.30

holding period yield = ($816.30 - $800) / $800 = 2.04%

annualized return = (1 + total return)¹/ⁿ - 1 = (1 + 0.0204)¹/² - 1 = 1.01%

(d) Suppose after 3 years, the yield to maturity on similar zeros declines to 3%.  Calculate the annual return if you sell the bond at that time.

1.03² = $1,000 / ?

? = $1,000 / 1.0609 = $942.60

holding period yield = ($942.60 - $800) / $800 = 17.83%

annualized return = (1 + total return)¹/ⁿ - 1 = (1 + 0.1783)¹/³ - 1 = 5.62%

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Answer:

<u>cause-related</u>

<u>Explanation:</u>

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Tomato sauce and spaghetti noodles are complementary goods. A decrease in the price of tomatoes will a. decrease consumer surplu
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Answer: c. increase consumer surplus in the market for tomato sauce and increase producer surplus in the market for spaghetti noodles.

Explanation:

A complementary good is the one which can be used only with another good. For example a CD can only run in a CD player or any other suitable device so the sales of CD is dependent upon the availability of device used to pay it. Other examples are tennis ball and tennis racket, mobile phone and sim cards, and others.

According to the given situation the decrease in price of tomato will be an advantage to the consumers as they will be able to purchase them with an affordable price and can produce tomato sauce this will promote the production of spaghetti noodles as tomato sauce is consumed along with spaghetti noodles this way the tomato sauce and spaghetti noodles are complementary goods for each other. The sales and production of one good will affect the sales and production of another.

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A rich uncle wants to make you a millionaire. How much money must he deposit in a trust fund paying 12% compounded quarterly at
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Answer:

P=24.92 per quarter

Explanation:

this problem can be solved applying the concept of annuity, keep in mind that an annuity is a formula which allows you to calculate the future value of future payments affected by an interest rate.by definition the future value of an annuity is given by:

s_{n} =P*\frac{(1+i)^{n}-1 }{i}

where s_{n} is the future value of the annuity, i is the interest rate for every period payment, n is the number of payments, and P is the regular amount paid. so applying to this particular problem, we have:

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we will asume that deposits are made as interest is compounded it is quarterly thats why we multiply 60 and 4 and also we divide 12% into 4, so:

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Answer:

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