The yield DU will have to pay and the spread over AAA bonds will it have to pay.

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Answer 1

Question

Chapter 12, Problem 17P

a.

Summary Introduction

To determine: The yield DU will have to pay and the spread over AAA bonds will it have to pay.

b.

Summary Introduction

To determine: The yield DU would have to pay if it were a recession, by assuming the expected loss rate is 80% and the spread over AAA bonds will have to pay.

c.

Summary Introduction

To determine: The redo calculation of part (b) by assuming that the market risk premium and the beta of debt both increase by 20%; that is, they equal 1.2 times their value in recessions.

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Lantech investor is deciding between two bonds: Bond A pay $72 annual interest and has a market value of $925. It has 10 years to maturity. Bond B pays $62 annual interest and has a market value of $910. It has two years to maturity. Par value of the bonds is $1,000. A. What is the current yield on both bonds? B. Which bond should be chosen and why? C. A drawback of current yield is that is doesn't consider the total life of the bond. E.g. Yield to maturity on Bond A is 8.33 percent. What is the yield to maturity on Bond B? D. Is your answer changed from parts B and C based on which bond should be chosen?

Consider two types of bonds: A 10 year to maturity corporate bond and a 10 year to maturity Treasury bond. We know that Corporate Bonds have default risk. Discuss the impact on the markets for these two type of bonds & on the risk premium when there is a FALL in the risk of corporate default? Provide a DISCUSSION of the impact and ILLUSTRATE the impact graphically using two diagrams, one for corporate bonds and one for Treasuries. The diagrams should show the impact on each yield and the impact on the risk premium [label your diagram clearly to illustrate the old premium vs. the new premium]. hint: draw your diagrams side by side, so you can show the risk premiums as done in lecture.

Please help me answer this question - there are two parts: What will be the price of these bonds if they receive either an A or a AA rating? See image for details.

Answer 2

Question

Chapter 12, Problem 17P

a.

Summary Introduction

To determine: The yield DU will have to pay and the spread over AAA bonds will it have to pay.

b.

Summary Introduction

To determine: The yield DU would have to pay if it were a recession, by assuming the expected loss rate is 80% and the spread over AAA bonds will have to pay.

c.

Summary Introduction

To determine: The redo calculation of part (b) by assuming that the market risk premium and the beta of debt both increase by 20%; that is, they equal 1.2 times their value in recessions.

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Answer 3

Question

Chapter 12, Problem 17P

a.

Summary Introduction

To determine: The yield DU will have to pay and the spread over AAA bonds will it have to pay.

b.

Summary Introduction

To determine: The yield DU would have to pay if it were a recession, by assuming the expected loss rate is 80% and the spread over AAA bonds will have to pay.

c.

Summary Introduction

To determine: The redo calculation of part (b) by assuming that the market risk premium and the beta of debt both increase by 20%; that is, they equal 1.2 times their value in recessions.

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Answer 4

Question

Chapter 12, Problem 17P

a.

Summary Introduction

To determine: The yield DU will have to pay and the spread over AAA bonds will it have to pay.

b.

Summary Introduction

To determine: The yield DU would have to pay if it were a recession, by assuming the expected loss rate is 80% and the spread over AAA bonds will have to pay.

c.

Summary Introduction

To determine: The redo calculation of part (b) by assuming that the market risk premium and the beta of debt both increase by 20%; that is, they equal 1.2 times their value in recessions.

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Answer 5

Chapter 12, Problem 17P

a.

Summary Introduction

To determine: The yield DU will have to pay and the spread over AAA bonds will it have to pay.

b.

Summary Introduction

To determine: The yield DU would have to pay if it were a recession, by assuming the expected loss rate is 80% and the spread over AAA bonds will have to pay.

c.

Summary Introduction

To determine: The redo calculation of part (b) by assuming that the market risk premium and the beta of debt both increase by 20%; that is, they equal 1.2 times their value in recessions.

Answer 6

Chapter 12, Problem 17P

a.

Summary Introduction

To determine: The yield DU will have to pay and the spread over AAA bonds will it have to pay.

Answer 7

Chapter 12, Problem 17P

a.

Summary Introduction

To determine: The yield DU will have to pay and the spread over AAA bonds will it have to pay.

Answer 8

b.

Summary Introduction

To determine: The yield DU would have to pay if it were a recession, by assuming the expected loss rate is 80% and the spread over AAA bonds will have to pay.

Answer 9

b.

Summary Introduction

To determine: The yield DU would have to pay if it were a recession, by assuming the expected loss rate is 80% and the spread over AAA bonds will have to pay.

Answer 10

c.

Summary Introduction

To determine: The redo calculation of part (b) by assuming that the market risk premium and the beta of debt both increase by 20%; that is, they equal 1.2 times their value in recessions.

Answer 11

c.

Summary Introduction

To determine: The redo calculation of part (b) by assuming that the market risk premium and the beta of debt both increase by 20%; that is, they equal 1.2 times their value in recessions.

Answer 12

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Answer 13

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Answer 14

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Answer 15

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The yield DU will have to pay and the spread over AAA bonds will it have to pay.

Solution Summary: The author calculates the yield DU will have to pay and the spread over AAA bonds will be 0.74%.

To determine: The yield DU will have to pay and the spread over AAA bonds will it have to pay.

To determine: The yield DU would have to pay if it were a recession, by assuming the expected loss rate is 80% and the spread over AAA bonds will have to pay.

To determine: The redo calculation of part (b) by assuming that the market risk premium and the beta of debt both increase by 20%; that is, they equal 1.2 times their value in recessions.

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Chapter 12 Solutions