A 10-year corporate bond has coupon rate equal to 5.5%. This bond has a par value equal to 100, pays annual coupons on November 17, and matures on November 17, 2033. Because of the credit risk associated with the payments of this bond, the market is discounting its cash flows using yields that are 3 percentage points higher than the yields required from credit- risk-free government bonds. As a result, this corporate bond has a yield to maturity equal to 6.711%. A. What is the price of the 10-year corporate bond? B. Using the first-order linear approximation, what would be the percentage change in the price of this 10-year corporate bond if its yield to maturity decreases by 0.5 percentage points?

A 10-year corporate bond has coupon rate equal to 5.5%. This bond has a par value equal to 100, pays annual coupons on November 17, and matures on November 17, 2033. Because of the credit risk associated with the payments of this bond, the market is discounting its cash flows using yields that are 3 percentage points higher than the yields required from credit- risk-free government bonds. As a result, this corporate bond has a yield to maturity equal to 6.711%. A. What is the price of the 10-year corporate bond? B. Using the first-order linear approximation, what would be the percentage change in the price of this 10-year corporate bond if its yield to maturity decreases by 0.5 percentage points?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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you invested in a corporate bond that has a market price today of R983.87and a yield to maturity of 7%. This bond has a modified duration of 5.3. You believe that interest rates are going to rise by 106 basis points. What price do you expect your bond to trade at if this anticipated change in the yield occurs?Use the duration rule to calculate your answer , in rands (R), correctto Two decimal places.
A 20 -year maturity bond with par value of $1,000 makes semiannual coupon payments at a coupon rate of 8%. Find the bond equivalent and effective annual yield to maturity of the bond if the bond price is: a. $950 b. $1,000 c. $1,050 Repeat Problem 11 using the same data, but now assume that the bond makes its coupon payments annually. Why are the yields you compute lower in this case? Solve ex 12.
klp.2
A BBB-rated corporate bond has a yield to maturity of 13.2%. A U.S. Treasury security has a yield to maturity of 11.8%. These yields are quoted as APRS with semiannual compounding. Both bonds pay semi-annual coupons at a rate of 12.7% and have 5 years to maturity. a. What is the price (expressed as a percentage of the face value) of the Treasury bond? b. What is the price (expressed as a percentage of the face value) of the BBB-rated corporate bond? c. What is the credit spread on the BBB bonds?
Even though most corporate bonds in the United States make coupon payments semianually, bonds issued elsewhere often have annual coupon payments. Suppose a German compay issues a bond with a par value of $1,000, 10 years to maturity, and a coupon rate of 6 percent paid annually. If the yield to maturity is 7.1 percent, what is the current price of the bond?
(Related to Checkpoint 9.4) (Bond valuation) A bond that matures in 19 years has a $1,000 par value. The annual coupon interest rate is 13 percent and the market's required yield to maturity on a comparable-risk bond is 12 percent. What would be the value of this bond if it paid interest annually? What would be the value of this bond if it paid interest semiannually? a. The value of this bond if it paid interest annually would be $ (Round to the nearest cent.)
A treasury bond with $100 maturity face value has a $9 annual coupon, and 15 years left to maturity. What price will the bond sell for assuming that the 15 year yield to maturity in the market is 4%, 9%, and 14% respectively. (Show working out, without the use of external software such as excel or stata) Explain whether the price movements would have been greater or smaller if a 10 year bond had been used rather than a 15 year one without any further calculations.
A Ford Motor Co. coupon bond has a coupon rate of 6.95%, and pays annual coupons. The next coupon is due tomorrow and the bond matures 36 years from tomorrow. The yield on the bond issue is 6.45%. At what price should this bond trade today, assuming a face value of $1,000? The price of the bond today should be $__________ (Round to the nearest cent.)
4. Using Excel or your favorite software: (a) A 5-year Treasury newly issued on February 15, 2021 would have a coupon equal to the 5-year par coupon and would have been priced at par. Confirm that your par coupon results in a par price for this bond. (b) Calculate the 6-month forward rates for all the cash-flow dates of your 5-year bond. Confirm that a 5-year floating rate bond with coupons equal to the forward rates prices at par. (c) Consider the case where the Federal Reserve increases rates in a way that results in an increase of all forward rates by 200 basis points: i. Recalculate the price of the fixed-rate bond using the par coupon you calcu- lated in part 4(a) above. Note that the discount factors will have changed because of the parallel shift in the forward curve. Briefly explain the price change or lack thereof. ii. Recalculate the price of the 5-year floating-rate bond. Briefly explain the price change or lack thereof. (d) A security known as an interest-rate swap can be…
A 5-year Treasury bond has a 4.6% yield. A 10-year Treasury bond yields 6.3%, and a 10-year corporate bond yields 8.85%. The market expects that inflation will average 2.1% over the next 10 years (IP10 = 2.1%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. X Open spreadsheet What is the yield on this 5-year corporate bond? Round your answer to two decimal places. %
Lin has a B rated $30,000 bond with a coupon of 2.5% maturing in 2030 that is currently yielding 3.2%. This year, the Fed is expected to lower interest rates by 50 basis points. Explain the effect on the price, yield and cash flow of the bond. (indicate if it will increase or decrease)
Now suppose a financial institution has a duration gap of -4 years and $5 million in assets. The cheapest to deliver bond for Treasury futures contracts has a duration of 3 years. How will the manager hedge this interest rate risk? Assume the cheapest to deliver bond is trading at par.

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