Problem 24-9 Default optionSquare File's assets are worth $100. It has $80 of zero-coupon debt outstanding that is due to be repaid at the end of two years. Therisk-free interest rate is 5%, and the standard deviation of the returns on Square File's assets is 40% per year.Calculate the present value of the company's debt and equity.Note: Do not round intermediate calculations. Round your answers to 2 decimal places.Present value of the company's debtPresent value of the company's equity

To calculate the present value of the company's debt and equity, we need to use the…

Answered: Problem 24-9 Default option Square…

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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Problem 24-14 Predicting default probability Upsilon's assets have a current market value of $100. Its debt has a face value of $60, and it matures in one year. Assume a risk-free rate of interest is 5%. Suppose that the standard deviation of the return on Upsilon's assets is 50%. Calculate the probability that the company will default. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Probability %
Problem 6-23 Real Returns (LO3) Suppose that you buy a TIPS (inflation-indexed) bond with a 2-year maturity and a (real) coupon of 4.4% paid annually. If you buy the bond at its face value of $1,000, and the inflation rate is 8.60% in each year. a. What will be your cash flow in year 1? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Cash flow b. What will be your cash flow in year 2? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Cash flow c. What will be your real rate of return over the two-year period? Note: Enter your answer as a percent rounded to 1 decimal place.
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31 ation An 8%, 8-year bond pays annual coupons and has 6 years to maturity. If the market interest rate is 9%, calculate the price of this bond. Show the (abbreviated) time line, the key entries/steps of FCS, and the (abbreviated) equation/expression of NS. Typing tips:
Sanity Check 1: Valuing Bond Issue ABS-CBN Corporation has issued bonds with coupon rate of 8%, P1000 par value, 20 years maturity. The bonds pay interest annually (at the end of each year) and market's required yield to maturity is 7%. At what price are you willing to pay to one of these bonds? STEP 1: Timing and Amount of cash flows STEP 2: Determine the YTM discount rate STEP 3: Compute for the PV of cash flows Bond Value = Interest (1 + YTM Market)" (1 + YTM starket) + Principal YTM Market
Question 2 Assume the yield curve is flat shown as following table. A cash and $duration-neutral butterfly is to be constructed by selling one thousand 7-year coupon paying bonds and purchasing qs and ql coupon paying bonds with maturities 3 and 15 years respectively. More information on the bonds to be used in the strategy is given Note that we are assuming all bonds pay interest semi-annually. (a) Explain how to interpret the modified duration of -8.86 corresponding to the 15-year maturity bond. (b) Write down the system of equations that needs to be solved in order to find qs and ql and verify that the solution to this system is qs = 679.32 and ql =366.23. (c) Find the profit from this strategy if yield curve moves: (i) up to 8% pa and (ii) down to 5% pa. (d) Explain why in practice it may be difficult to profit from the cash and $duration neutral butterfly. (e) Explain the major differences between the 50-50 butterfly strategy and the cash and $duration neutral butterfly.

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