Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 3, Problem 19PS
Spot interest rates and yields Is the yield on high-coupon bonds more likely to be higher than that on low-coupon bonds when the term structure is upward-sloping or when it is downward-sloping? Explain.
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3. Bond prices and yields (S3.1) Construct some simple examples to illustrate your answers to the following:
Describe the differences between the yield to maturity (YTM) and the yield to call (YTC) on a bond. Why would the return to the investor be different if a bond is called? Justify your answer
Give a definition for the term "bond price elasticity." Would the price elasticity of bonds imply that zero-coupon or high-coupon bonds with the same yield to maturity have a greater price sensitivity? Why? What effect does this have on the market value volatility of zero-coupon Treasury bonds held in mutual funds vs high-coupon Treasury bonds?
Chapter 3 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 3 - (PRICE) In February 2009, Treasury 8.5s of 2020...Ch. 3 - (YLD) On the same day, Treasury 3.5s of 2018 were...Ch. 3 - (DURATION) What was the duration of the Treasury...Ch. 3 - (MDURATION) What was the modified duration of the...Ch. 3 - Prob. 1PSCh. 3 - Bond prices and yields The following statements...Ch. 3 - Prob. 3PSCh. 3 - Bond prices and yields A 10-year German government...Ch. 3 - Bond prices and yields Construct some simple...Ch. 3 - Spot interest rates and yields Which comes first...
Ch. 3 - Prob. 7PSCh. 3 - Spot interest rates and yields Assume annual...Ch. 3 - Prob. 9PSCh. 3 - Prob. 10PSCh. 3 - Duration True or false? Explain. a....Ch. 3 - Duration Calculate the durations and volatilities...Ch. 3 - Term-structure theories The one-year spot interest...Ch. 3 - Real interest rates The two-year interest rate is...Ch. 3 - Duration Here are the prices of three bonds with...Ch. 3 - Prob. 16PSCh. 3 - Prob. 17PSCh. 3 - Spot interest rates and yields A 6% six-year bond...Ch. 3 - Spot interest rates and yields Is the yield on...Ch. 3 - Prob. 20PSCh. 3 - Prob. 21PSCh. 3 - Duration Find the spreadsheet for Table 3.4 in...Ch. 3 - Prob. 23PSCh. 3 - Prob. 25PSCh. 3 - Prob. 26PSCh. 3 - Prob. 27PSCh. 3 - Prob. 28PSCh. 3 - Prob. 29PSCh. 3 - Prices and yields If a bonds yield to maturity...Ch. 3 - Prob. 31PSCh. 3 - Price and spot interest rates Find the arbitrage...Ch. 3 - Prob. 33PSCh. 3 - Prices and spot interest rates What spot interest...Ch. 3 - Prices and spot interest rates Look one more time...
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- Explain the differences between a bond's yield to maturity (YTM) and its yield to call (YTC). Is there a reason why the return to the investor would alter if a bond is called? Please provide justification for your response.arrow_forwardIf the yield curve in the bond market shows a flat curve, what do you think about the prediction of the liquidity premium in explaining this phenomenon? Then do you prefer the prediction of expectation theory in explaining this phenomenon?arrow_forwardhow will the modified duretion of a floating coupon bond be compared to the modified duration of a fixed rate coupon bond? (same, higher or lower?) (floating coupon adjust coupon accotding to interest rate level, ie higher interest rate results in higher coupon payment)arrow_forward
- What does "bond price elasticity" mean? How does the price elasticity of bonds compare to the yield to maturity of zero-coupon bonds? Why? Which means that zero-coupon Treasury bonds are more volatile than high-coupon Treasury bonds in terms of market value.arrow_forwardWhat will be the price of a bond in which the YTM is higher than the coupon rate? a. Below face value b. At face value c. Above face value d. Cannot be determinedarrow_forwardWhy does the yield on a discount bond surpass the coupon rate?arrow_forward
- With regard to interest rate sensitivity measures and bonds: Group of answer choices C. Convexity attempts to capture the sensitivity of a bond’s duration to changes in interest rates. D. Both B & C B. Duration is related to yield approximation and convexity is related to price. A. Convexity is related to yield approximation and duration is related to pricearrow_forwardThe yield curve varies over time based the relative riskiness of buying a single long-term bond versus purchasing multiple short-term bonds. This explanation of the yield curve is most consistent with A.the Fisher Effect theoryB.the market segmentation theoryC.the unbiased expectations theoryD.the liquidity preference theoryarrow_forwardInterest Rate risk depends upon how sensitive the bond price is to interest rate changes (i.e., maturity and coupon rate). T/Farrow_forward
- Under what conditions will a discount bond have anegative nominal interest rate? Is it possible for a coupon bond or a perpetuity to have a negative nominalinterest rate?arrow_forwardExplain the concept of bond price elasticity. Would bond price elasticity suggest a higher price sensitivity for zero-coupon bonds or high-coupon bonds that are offering the same yield to maturity? Why? What does this suggest about the market value volatility of mutual funds containing zero-coupon Treasury bonds versus high-coupon Treasury bonds?arrow_forwardThe difference in yield between a credit-risky bond and a credit-risk-free bond of similar maturity is called its yield spread. Select one: True Falsearrow_forward
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What happens to my bond when interest rates rise?; Author: The Financial Pipeline;https://www.youtube.com/watch?v=6uaXlI4CLOs;License: Standard Youtube License