Finance-Related Problems: Bonds and Returns
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10. Bond Returns
Quiz question 6 A bond has 10 years until maturity a coupon rate of 8% and sells for $1100
a) If the bond in Quiz Question has a yield to maturity of 8% 1 year from now, what its price be?
b) What will be the rate of return on the bond
c) If the inflation rate during the year is 3%, what is the real rate of return on the bond
13. Bond Pricing. Repeat the previous problem assuming semiannual coupon payments
15. Consol bonds. Perpetual life corp. has issued consol bonds with coupon payments of $60. (Consol pay interest forever and never mature. They are perpetuities.) If the required rate of return on these bonds they were issued was 6%, at what price were they sold to the public? If the required return today is 10% at what price do the consols sell?
25. Real returns. Suppose that you buy a 1-year maturity bond for $1000 that will pay you back $1000 plus a coupon payment of $60 at the end of the year. What real rate of return will you earn if the inflation rate is
2%
4%
6%
8%
26. Now suppose that the bond in the previous problem is a TIPS (Inflation-indexed) bond with a coupon rate of 4%. What will the cash flow provided by the bond be for each of the four inflation rates? What will be the real and nominal rates of return on the bond in each scenario?
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Solution Summary
The following posting helps with finance-related problems. Concepts discussed include bond returns, bond pricing, consol bonds, real returns.
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10. Bond Returns Quiz question 6
A bond has 10 years until maturity a coupon rate of 8% and sells for $1100
a) If the bond in Quiz Question has a yield to maturity of 8% 1 year from now, what will its price be?
b) What will be the rate of return on the bond?
c) If the inflation rate during the year is 3%, what is the real rate of return on the bond?
For the bond, the future value is its face value:
FV = $1000
Coupon PMT = FV*coupon rate = 1000*8% = $80 Annually
The current purchasing price is P0 = $1100
a) When the yield to maturity is equal to the coupon rate, the bond should be sold at par. That is, its selling price (P1) should be equal to its face value of $1000.
b) return rate = yield to maturity = 4%
c) According to Fisher Effect,
real rate of return = nominal rate of return - inflation rate
= 4% - 3%
= 1%
13.Bond Pricing. Repeat the previous problem assuming semiannual coupon payments
a) When the yield to maturity is equal to the coupon rate, the bond should be sold at par. ...
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