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When the market rate of return for a particular bond is much less than its coupon rate the bond is selling at?
If the current interest rate is lower than the coupon rate, a bond will be priced at a premium. For example, a bond originally issued at par with a 5% coupon would initially yield 5% to an investor. If market rates subsequently dropped to 3%, the bond would be selling at a premium to reflect the lower interest rate. In this example, the original bond sold for $1,000 and had a coupon rate of 5% to yield $50 per year in interest. If interest rates dropped to 3%, the price of the bond would increase to approximately $1,667. A purchaser of the bond would still receive $50 per year in interest which would provide an annual yield of 3% ($50/$1,667 = 3.0%).
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When to cash a zero coupon bond?
A zero coupon bond should be cashed at maturity to receive its full face value, as it does not pay periodic interest. Cashing it before maturity may result in a lower return, as it will typically trade at a discount to its face value. However, if you need immediate cash or if market conditions significantly change, you might consider selling it before maturity. Always assess your financial needs and market conditions before making a decision.
Why the discount bond is not a bargain?
Because the rate of return it is still a function of market influences. Whether a bond is premium or discount is merely a reference of the coupon rate vs the real market interest rate. If the issuer sets their coupon rate below the market rate, it is said to be discounted. Set the coupon rate above the market interest rate and it is said to be premium. An invester pays below face value for a discount bond and above for a premium. In the end, the invester receives a return on their investment that aligns with the real market interest rates. Premium vs Discount is merely a reference point from where you start - you still end up in the same place.
What is the strategy of selling a stock and buying it back in order to potentially profit from fluctuations in the market?
The strategy of selling a stock and buying it back to potentially profit from market fluctuations is called "short selling." This involves borrowing a stock, selling it at the current price, and then buying it back at a lower price to return it to the lender, pocketing the difference as profit.
Are bonds sold at a face value when the contract is equal to the market rate of interest?
Yes, bonds are typically sold at face value (also known as par value) when the contract interest rate, or coupon rate, is equal to the market rate of interest. In this scenario, investors find the bond's return consistent with current market conditions, leading to no premium or discount on its price. If the coupon rate deviates from the market rate, the bond may then be sold at a premium or a discount.
If the beta coefficient is 1.5 and the required rate of return is 14.0 and the risk free rate is 5.0 what is the market return?
.14=.05+1.5(market return-.05) .09=1.5market return-.075 .165/1.5=market return .11 or 11%=market return
What is the relationship between required rate of return and coupon rate on the value of bond?
The relationship between the required rate of return and the coupon rate significantly affects a bond's value. If the required rate of return is higher than the coupon rate, the bond will typically trade at a discount, as investors seek higher yields elsewhere. Conversely, if the required rate of return is lower than the coupon rate, the bond will trade at a premium, since it offers more attractive returns relative to current market rates. Thus, changes in the required rate of return directly influence the bond's market price.
When to cash a zero coupon bond?
A zero coupon bond should be cashed at maturity to receive its full face value, as it does not pay periodic interest. Cashing it before maturity may result in a lower return, as it will typically trade at a discount to its face value. However, if you need immediate cash or if market conditions significantly change, you might consider selling it before maturity. Always assess your financial needs and market conditions before making a decision.
Why are some bonds selling at more than their face values?
Because the coupon rate (periodical cash paid) exceeds the yield (investors overall return requirement).
Do short selling stocks have a higher or lower return rate?
Short selling stocks is risky because there are no guarantees of what the market share will be after the sell. The return rate could be high or low, depending on if the stocks fell as predicted.
What is the difference between coupon rate and market rate of interest?
The coupon rate is the fixed annual interest payment a bond issuer agrees to pay to bondholders, expressed as a percentage of the bond's face value. In contrast, the market rate of interest fluctuates based on prevailing economic conditions and reflects the return investors require for lending their money. When the market rate exceeds the coupon rate, the bond may trade at a discount; when the market rate is lower, the bond may trade at a premium. Essentially, the coupon rate is set at issuance, while the market rate varies over time.
What was the average stock market return in the US for the period 1990 1999?
The average stock market return in the US for the period 1990-1999 was actually seen as being pretty good at 11.83%. It was a very good time period for buying and selling within the market.
Why the discount bond is not a bargain?
Because the rate of return it is still a function of market influences. Whether a bond is premium or discount is merely a reference of the coupon rate vs the real market interest rate. If the issuer sets their coupon rate below the market rate, it is said to be discounted. Set the coupon rate above the market interest rate and it is said to be premium. An invester pays below face value for a discount bond and above for a premium. In the end, the invester receives a return on their investment that aligns with the real market interest rates. Premium vs Discount is merely a reference point from where you start - you still end up in the same place.
What is the strategy of selling a stock and buying it back in order to potentially profit from fluctuations in the market?
The strategy of selling a stock and buying it back to potentially profit from market fluctuations is called "short selling." This involves borrowing a stock, selling it at the current price, and then buying it back at a lower price to return it to the lender, pocketing the difference as profit.
What is the difference between yield and coupon rate?
The difference between the coupon rate and the required return of a bond is dependent upon the type of bond. Junk bonds will have the biggest difference between its return and the coupon rate.
What does market return mean?
Market return is the return on the market as a whole, called the market portfolio. A return in the stock market is the yield or profit that an investor earns from a security.
When you purchase an item with a coupon then return the item should the retailer give back the full shelf price or just what you pay and does he keep the coupon or return it to the buyer?
He gives you back the price you paid for and keeps the coupon because you can't use it anymore.
What is unsystematic return?
Unsystematic return refers to the portion of an investment's return that is specific to a particular asset or company and is not attributable to market-wide movements. It includes factors such as management decisions, product success, or competitive positioning, which can affect an individual stock's performance independently of market trends. Unlike systematic return, which is influenced by overall market conditions, unsystematic return can be mitigated through diversification, as the unique risks associated with individual assets can offset each other.
