The Isabelle Corporation rents prom dresses in its stores across the southern United States. It has just issued a five-year, zero-coupon corporate bond at a price of $62 (assume a $100 facevalue bond). You have purchased this bond and intend to hold it until maturity.a. What is the yield to maturity of the bond?b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default?c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value?d. What is the expected return (expressed as an EAR) if the probability of default is 50% in good times, the likelihood of default is higher in bad times than good times, and, in the case of default, youwill recover 90% of the face value?e. For parts (b) through (d), what can you say about the five-year, risk-free interest rate in each case?Note: Assume annual compounding.Ca. What is the yield to maturity of the bond?The yield to maturity of the bond is 10.03%. (Round to two decimal places.)b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default?The expected return on your investment is %. (Round to two decimal places.)

Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts…

a. What is the yield to maturity of the bond? b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default? c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value?

a. What is the yield to maturity of the bond? b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default? c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value?

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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If interest rates increase, after a bond is issued, the yield to maturity will _____________.
1. Which of the following is correct? Group of answer choices 1. The lower the price you pay for a bond, the greater is your return. 2. A bond is overpriced when its value is greater than its price. 3. A fairly priced bond has a price equal to its face. 4. The value of a bond can be determined by the present value of all coupon payments and the present value of principal payment at maturity date.
The normal yield curve states that long-term investors are compensated for which risk? A Maturity risk B Default risk C Sovereign risk D None of the above
A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. The security's liquidity risk premium is 0.35 percent and the maturity risk premium is 0.95 percent. The security has no special covenants. What is the security's equilibrium rate of return?
5. Bond yields Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This percentage return is referred to as the bond’s yield. Yield to maturity (YTM) is the rate of return expected from a bond held until its maturity date. However, the YTM equals the expected rate of return under certain assumptions. A. Which of the following is one of those assumptions? The probability of default is zero. The bond is callable. B. Consider the case of Badger Corp.: Badger Corp. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,220.35. However, Badger Corp. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on Badger Corp.’s bonds? Value YTM YTC C. If interest rates are expected to remain constant, what is the…
A particular security’s default risk premium is 2 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.5 percent. The security’s liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the security’s equilibrium rate of return.
Determine whether the following statements are TRUE or FALSE. Briefly explain your answers. (a) “When a consol is priced above its par value, the yield to maturity equals coupon rate.” (b) "If the actual inflation rate is higher than expected, both borrowers and lenders will lose"
5. Бопа уyielas Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This percentage return is referred to as the bond's yield. Yield to maturity (YTM) is the rate of return expected from a bond held until its maturity date. However, the YTM equals the expected rate of return under certain assumptions. Which of the following is one of those assumptions? The bond will not be called. The bond has an early redemption feature. Consider the case of Blanche Inc.: Blanche Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,130.35. However, Blanche Inc. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on Blanche Inc.'s bonds? YTM YTC Value If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Blanche Inc.'s bonds? 13…
True or False: Assuming all else is equal, the shorter a bond's maturity, the more its price will change in response to a given change in interest rates. False True
8. Given the following information what must be the risk-free rate of interest (assume the asset is properly priced)? The expected return of the market is 14.25%, the stock's B is.82 and the expected return of the asset is 12.89%. A.5.91% B. 6.69% C. 7.41% D. 8.93%
Which type of bonds will have more volatile prices and returns? A. 30-year Treasuries B. 10-year Treasuries
It is the interest rate that the buyer will actually earn if the bond is held to maturity and there is no default. A. yield to maturity B. no choice given c. current yield d. coupon discount rate e. coupon payment rate

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