(a)
To Discuss:
To use a spreadsheet to calculate the duration of the two bonds in Spreadsheet 11.1 if the market interest rate increases to 12%.The explanation of the reason of the fall in the duration of the coupon bond while the duration of the zero-coupon bond remaining unchanged is to be given.
Spreadsheet 11.1
Introduction:
A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond.A zero-coupon bond is a bond where the face value is repaid at the time of maturity.
Yield to maturity means the discount rate which makes the present payments from the bond equal to the price, in simple terms it is the average
(b)
To Discuss:
To use the same spreadsheet to calculate the duration of the coupon bond if the coupon were 12% instead of 8%.The explanation of the reason of the duration of the coupon bond being lower is to be given.
Spreadsheet 11.1
Introduction:
A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond. A zero-coupon bond is a bond where the face value is repaid at the time of maturity.
Yield to maturity means the discount rate which makes the present payments from the bond equal to the price, in simple terms it is the average rate of return a holder can expect from that bond. Duration is a measure of the sensitivity of the price -- the value of principal -- of a bond to a change in interest rates. The duration of a zero-coupon bond is equal to the time to maturity of the bond.
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Chapter 11 Solutions
ESSENTIALS OF INVESTMENTS - CONNECT ACCE
- A firm needs to raise $950,000 but will incur flotation costs of 5%. How much will it pay in flotation costs? Multiple choice question. $55,500 $50,000 $47,500 $55,000arrow_forwardWhile determining the appropriate discount rate, if a firm uses a weighted average cost of capital that is unique to a particular project, it is using the Blank______. Multiple choice question. pure play approach economic value added method subjective approach security market line approacharrow_forwardWhen a company's interest payment Blank______, the company's tax bill Blank______. Multiple choice question. stays the same; increases decreases; decreases increases; decreases increases; increasesarrow_forward
- For the calculation of equity weights, the Blank______ value is used. Multiple choice question. historical average book marketarrow_forwardA firm needs to raise $950,000 but will incur flotation costs of 5%. How much will it pay in flotation costs? Multiple choice question. $50,000 $55,000 $55,500 $47,500arrow_forwardQuestion Mode Multiple Choice Question The issuance costs of new securities are referred to as Blank______ costs. Multiple choice question. exorbitant flotation sunk reparationarrow_forward
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- To invest in a project, a company needs $50 million. Given its flotation costs of 7%, how much does the company need to raise? Multiple choice question. $53.76 million $46.50 million $50.00 million $53.50 millionarrow_forwardWhile determining the appropriate discount rate, if a firm uses a weighted average cost of capital that is unique to a particular project, it is using the Blank______. Multiple choice question. economic value added method pure play approach subjective approach security market line approacharrow_forwardWhat are flotation costs? Multiple choice question. They are the costs incurred to issue new securities in the market. They are the costs incurred to insure the payment due to bondholders. They are the costs incurred to meet day to day expenses. They are the costs incurred to keep a project in the business.arrow_forward
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