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Expert-verified Found in: Page 332 ### Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

# Question: Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1,000 at maturity. The second has an 8% coupon rate and pays the$80 coupon once per year. The third has a 10% coupon rate and pays the $100 coupon once per year.a. If all three bonds are now priced to yield 8% to maturity, what are their prices?b. If you expect their yields to maturity to be 8% at the beginning of next year, what will their prices be then? What is your rate of return on each bond during the one-year holding period? Answer a.  Zero 8% coupon 10% coupon Current Prices (A)$463 $1000$1134.20

b.

 Rate of return (Income / Current Prices) 8.00% 8.00% 8.00%
See the step by step solution

## Step 1: Given information

Maturity period = 10 Years

Zero coupons matures at $1000 Coupon income for all three is$0, $80 and$100

## Step 2: Calculation of Current prices

If the yield to maturity of three bonds is 8% at the beginning of the next year, it would be calculated using 9 years of maturity in place of 10 years.

Therefore,

 Zero 8% coupon 10% coupon Current Prices (A) $463$1000 $1134.20 ## Step 3: Calculation of rate of return  Zero 8% coupon 10% coupon Current Prices (A) PV= (0.8, 10, PMT, 1000)$463 $1000$1134.20 Price one year from now (B) PV= (0.8, 9, PMT, 1000) $500.25$1000 $1124.94 Price increase (B-A)$37.06 $0.00$-9.26 Coupon income (Given) $0.00$80 $100 Income (Price increase + Coupon Income)$37.06 $80$90.74 Rate of return (Income / Current Prices) 8.00% 8.00% 8.00% ### Want to see more solutions like these? 