Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. an investor is considering between purchasing a tr

An investor is considering between purchasing a Treasury Bond and a bond from a large...

80.2K

Verified Solution

Question

Finance

An investor is considering between purchasing a Treasury Bond and a bond from a large corporation. Both bonds have a face value of $1,000. The Treasury Bond has no risk, while the corporate bond has a 10% change of not repaying (a default). Both bonds are 2-year bonds and dont pay any coupons, only the final payment at maturity.

a) Assuming that the interest rate in year 1 is 10% and in year 2 is expected to be 5%, what is the current price of each bond? Why are the values different?

b) Now assume that the investor purchased the Treasury Bond a year has passed. How much can this bond be sold for if the interest rate is confirmed at 5%?

c) Continue assuming that the investor purchased the Treasury Bond a year has passed. If the investor is offered the corporate bond for $800, should it be purchased? Explain.

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Physics
1.2K views

Describe the process of combustion. How do flammable materials ignite? Describe the three methods by which heat...

Physics
1.2K views

The velocity of a small ball of mass M and density d when dropped in...

Basic Math
1.2K views

Employees at the Me My Mop and I cleaning service are choosing a new company...

Basic Math
1.2K views

Apply three different colors of data bars to lunch dinner and delivery sales in the...

Basic Math
1.2K views

2 1 point Finite differences can be used to determine whether a function is exponential

Statistics
1.2K views

K Use the given data set to complete parts a through c below Use 0...

Accounting
1.2K views

The management of Musselman Corporation would like to set the selling price on a new...

Accounting
1.2K views

Acoma, Incorporated, has determined a standard direct materials cost per unit of $7.40 (2 feet...

Accounting
1.2K views

On September 1, ABC Company borrows $8,000 from a bank and signs a note for...

Accounting
1.2K views

The steps in management's decision-making process are listed in random order below. Indicate the order...

Accounting
1.2K views

Company X has a machine with a book value of $10,000 and a fair value...

Finance
1.2K views

4) A treasurer has excess cash for the day and want to choose between the...