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    Hey, I would really appreciate some help with these questions. A step-by-step on how to approach it would be good too.

    Bonds:


    4¾% Treasury Stock 2020 Issued on 29th March 2005, Redeemed on 7th March 2020

    4¾% Treasury Stock 2038 issued on 23rd April 2004, Redeemed on 7th December, 2038


    • a) Calculate the prices of the bonds assuming an annual yield to maturity of 4%.
    • b) What would happen to the value of the bonds you estimated in a) if the yield to maturity goes up? Why?
    • c) Comment on the following statement: “A zero coupon bond cannot be attractive to investors since it pays no interest”



    I really need help with this so if anyone has any ideas I'd really appreciate it, thanks
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    (Original post by 0zzy94)
    Hey, I would really appreciate some help with these questions. A step-by-step on how to approach it would be good too.

    Bonds:



    4¾% Treasury Stock 2020 Issued on 29th March 2005, Redeemed on 7th March 2020

    4¾% Treasury Stock 2038 issued on 23rd April 2004, Redeemed on 7th December, 2038




    • a) Calculate the prices of the bonds assuming an annual yield to maturity of 4%.
    • b) What would happen to the value of the bonds you estimated in a) if the yield to maturity goes up? Why?
    • c) Comment on the following statement: “A zero coupon bond cannot be attractive to investors since it pays no interest”




    I really need help with this so if anyone has any ideas I'd really appreciate it, thanks
    Construct the cash flows, discount at 4% for the first part.

    For the second part a higher yield means more risk. Equally for something with a fixed cash flow how is it possible to vary the yield? I.e. to get a higher yield what must happen to the price?

    For 3 you have the fact there is no coupon but also that it still has a yield as it will trade at a discount to the redemption value. Due to the lack of coupon there is slightly greater exposure to credit risk. In a world with no tax and no transaction costs if you held a significant number of these bonds you could artificially create the equivalent coupon bond by selling some every so often.
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    (Original post by natninja)
    Construct the cash flows, discount at 4% for the first part.

    For the second part a higher yield means more risk. Equally for something with a fixed cash flow how is it possible to vary the yield? I.e. to get a higher yield what must happen to the price?

    For 3 you have the fact there is no coupon but also that it still has a yield as it will trade at a discount to the redemption value. Due to the lack of coupon there is slightly greater exposure to credit risk. In a world with no tax and no transaction costs if you held a significant number of these bonds you could artificially create the equivalent coupon bond by selling some every so often.
    Thanks, really appreciate it.

    Could you lay it out, step by step, mathematically?

    Like which formula you'd use etc. Because I have the Bond Price formula.. I know what the YTM rate is but I do not know the 'C' (coupon) and I'm not to sure about 'N' either, since for the first bond it's nearly 15 years but it's actually just less than that... Does that mean N = 15?

    Ughh so confused. Is the Coupon the percentage listed in the title of the bond, if that's the case I take it I assume par is 100, then that just leaves N (periods, or how many coupons) and this confuses me... Is there a coupon annually or semi annually. Even if it's annual, does that make N = 15? But it's actually more like 14.9 years between the issue date and the redeemed date so idk. I double checked to see if I'm missing key info.

    Edit: I messaged you but I'll add it here too if it's more convienient

    Hey,
    I don't wanna be of bother but in regards to my finance question, could you lay it out mathematically step by step with the answer so I can reverse engineer and apply it to the other questions?

    If you're short on time could you help me with what each value is, i only know the YTM rate.

    Formula I'm using to work out bond price:

    P = C x (1/YTM) - 1/YTMx(1+YTM) to the power of n) + par/1+YTM to the power of n

    I take it I assume par is 100, I know my YTM but what's my coupon (c) and n? is n 15?

    Really would be a life saver here, thanks regardless
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    (Original post by 0zzy94)
    Thanks, really appreciate it.

    Could you lay it out, step by step, mathematically?

    Like which formula you'd use etc. Because I have the Bond Price formula.. I know what the YTM rate is but I do not know the 'C' (coupon) and I'm not to sure about 'N' either, since for the first bond it's nearly 15 years but it's actually just less than that... Does that mean N = 15?

    Ughh so confused. Is the Coupon the percentage listed in the title of the bond, if that's the case I take it I assume par is 100, then that just leaves N (periods, or how many coupons) and this confuses me... Is there a coupon annually or semi annually. Even if it's annual, does that make N = 15? But it's actually more like 14.9 years between the issue date and the redeemed date so idk. I double checked to see if I'm missing key info.

    Edit: I messaged you but I'll add it here too if it's more convienient

    Hey,
    I don't wanna be of bother but in regards to my finance question, could you lay it out mathematically step by step with the answer so I can reverse engineer and apply it to the other questions?

    If you're short on time could you help me with what each value is, i only know the YTM rate.

    Formula I'm using to work out bond price:

    P = C x (1/YTM) - 1/YTMx(1+YTM) to the power of n) + par/1+YTM to the power of n

    I take it I assume par is 100, I know my YTM but what's my coupon (c) and n? is n 15?

    Really would be a life saver here, thanks regardless
    Coupon is 4.75% as per the question, assume redemption is at par, n would be 2 I think if looking at price today, 15 if looking at issue price.
 
 
 
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