The yield on a corporate bond is 10%, and it is currently selling at par. The marginal tax rate is 20%. A par value municipal bond with a coupon rate of 8.50% is available. Which security is better to buy?

The yield on a corporate bond is 10%, and it is currently selling at par. The marginal tax rate is 20%. A par value municipal bond with a coupon rate of 8.50% is available. Which security is better to buy?

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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A corporate bond with a 7.600 percent coupon has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 9.9 percent. The firm has recently become more financially stable and the rating agency is upgrading the bonds to BBB. The new appropriate discount rate will be 8.8 percent. (Assume interest payments are semiannual.) What will be the change in the bond's price in dollars? What will be the change in the percentage terms? Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Change in bond price $78.90 Change in bond percent %
The total market value of the equity of Okefenokee Condos is $12 million, and the total value of its debt is $8 million. The treasurer estimates that the beta of the stock currently is 1.3 and that the expected risk premium on the market is 10%. The Treasury bill rate is 3%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a whole percent. b. Estimate the WACC assuming a tax rate of 21%. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. Estimate the discount rate for an expansion of the company's present business. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 1.5.…
Suppose currently 10-year Treasury bond yields 0.9% and 10-year municipal bond offers 0.8% yield. Also, your federal income tax rate is 30% and state income tax rate is 12%. Calculate the risk premium (spread) of this municipal bond. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
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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?
An investment firm recommends that a client invest in bonds rated AAA, A, and B. The average yield on AAA bonds is 4%, on A bonds 5%, and on B bonds 8%. The client wants to invest twice as much in AAA bonds as in B bonds. How much should be invested in each ype of bond if the total investment is $9,000, and the investor wants an annual return of $470 on the three investments? The client should invest $ in AAA bonds, $in A bonds, and $[ in B bonds.
If the estimated return on a corporate bond is 8%, while the return on US Treasury bond is 3%. How much is the risk premium in this case? Hint: The risk premium is the compensation investors required to hold the risky asset. It equals the expected return on the risky investment minus the risk-free return.
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Adidas issued a zero-coupon bond with a five-year maturity and a $100 face value. You believe there is a 20% chance that they will default, and if they do default, you expect to receive only 55 cents per dollar of what you are promised. If you require a 6% expected return on this investment: a. what will be the price of these bonds, and 2. what will be the yield to maturity on these bonds? Note: Assume annual compounding. Question content area bottom Part 1 a. The price of these bonds is $enter your response here. (Round to the nearest cent.) b. The yield to maturity on these bonds is enter your response here%. (Round to two decimal places.)
How much would you pay for a perpetual bond that pays an annual coupon of $200 per year and yields on competing instruments are 10%? You would pay $ 2000. (Round your response to the nearest penny) If competing yields are expected to change to 12%, what is the current yield on this same bond assuming that you paid $2,000? The current yield is 10%. (Round your response to the nearest integer.) If you sell this bond in exactly one year, having paid $2,000, and received exactly one coupon payment, what is your total return if competing yields are 12%? Your total return is %. (Round your response to two decimal places)
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 face value 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, you will 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. C a. What is the yield to maturity of the bond? The yield to…

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