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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Textbook Question
Chapter 3, Problem 2PS
- a. If a bond’s coupon rate is higher than its yield to maturity, then the bond will sell for more than face value.
- b. If a bond’s coupon rate is lower than its yield to maturity, then the bond’s price will increase over its remaining maturity.
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Students have asked these similar questions
If the yield of maturity of the bond is equal the coupon rate, the price of this bond will be?
a. Lower than the par value.
b. Equal the par value.
c. Higher than the par value.
Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This percentage return is referred to
as the bond's yield.
Yield to maturity (YTM) is the rate of return expected from a bond held until its maturity date. However, the YTM equals the expected rate of return
under certain assumptions. Which of the following is one of those assumptions?
O The bond is callable.
O The probability of default is zero.
Consider the case of Demed Inc.:
Demed Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their
current market price is $950.35. However, Demed Inc. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to
call (YTC) on Demed Inc.'s bonds?
Value
YTM
YTC
If interest rates are expected to remai constant, what is the best estimate of the remaining life left for Demed Inc.'s bonds?
O 5 years
O 13 years
O 18 years
O 8 years…
2. For cach of the following situation, identify whether a bond would be considered a premium bond,
a discounted bond, or a par bond.
a. A bond's current market price is greater than its face value.
b. A bond's coupon rate is equal to its yield to maturity.
c. A bond's coupon rate is less than its required rate of return.
d. A bond's coupon rate is less than its yield to maturity.
e. A bond's coupon rate is greater than its yield to maturity.
f. A bond's fair present value is less than its face value.
Answer:
a.
.....
b.
с.
d.
e.
f.
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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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Which of the following statements is/are most CORRECT? O 11 A yield curve depicts the relationship between bond's 'time to maturity and its yield to maturity. 2) A premium bond's price will decline over time if the required return remains unchanged. 3) A discount bond's price will decline over time if the required return remains unchanged. 4) Both a and b are correct.arrow_forwardIf a bond sells for its par value, the coupon interest rate and yield to maturity are equal. True False *arrow_forwardThe duration of a bond is the weighted average maturity of the future cash flows expected to be received on a bond. Which of the following is a true statement concerning duration? The shorter the duration, the greater will be the bond's price volatility. All of the above are true. The longer the term to maturity, the greater will be the duration. The greater the coupon amount, the greater will be the duration.arrow_forward
- . Bond yields Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This percentage return is referred to as the bond’s yield. Yield to maturity (YTM) is the rate of return expected from a bond held until its maturity date. However, the YTM equals the expected rate of return under certain assumptions. Which of the following is one of those assumptions? The bond is callable. The probability of default is zero. Consider the case of Demed Inc.: Demed Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,160.35. However, Demed Inc. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on Demed Inc.’s bonds?arrow_forwardWhich one of the following statements is true regarding bond valuation?a. When yield to maturity is higher than coupon rate, the bond is called a premium bondb. When yield to maturity is higher than coupon rate, the bond is traded at parc. When yield to maturity is less than coupon rate, the bond is called a discount bondd. When yield to maturity is higher than coupon rate, the bond is called a discount bonde. When yield to maturity is equal to coupon rate, the bond is called a premium bondarrow_forwardWhich of the following statements is false? A. Other things being equal, an increase in a bond’s maturity will increase its interest rate risk. B. Other things being equal, an increase in the coupon rate of a bond will decrease its interest rate risk. C. Other things being equal, an increase in a bond’s YTM will decrease its interest rate risk. D. Effective duration is calculated as Macaulay duration divided by one plus the bond’s yield to maturity.arrow_forward
- 2. Bond prices and yields (S3.1) The following statements are true. Explain why. a. If a bond's coupon rate is higher than its yield to maturity, then the bond will sell for more than face value. b. If a bond's coupon rate is lower than its yield to maturity, then the bond's price will increase over its remaining maturity.arrow_forward1. Which of the following is correct? Group of answer choices 1. The lower the price you pay for a bond, the greater is your return. 2. A bond is overpriced when its value is greater than its price. 3. A fairly priced bond has a price equal to its face. 4. The value of a bond can be determined by the present value of all coupon payments and the present value of principal payment at maturity date.arrow_forwardHolding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's: Select one: a. term-to-maturity is lower or coupon rate is lower or yield to maturity is higher O b. term-to-maturity is higher or coupon rate is higher or yield to maturity is lower Oc. term-to-maturity is lower or coupon rate is lower or yield to maturity is lower d. term-to-maturity is higher or coupon rate is lower or yield to maturity is higher e. None of the answers are correctarrow_forward
- 4. The following statements describe the general characteristics of price of the coupon bond. Which one is false? a. When the market interest rate falls, the bond price rises. b. The value of bond can be computed as the sum of PDV (present discount value) of all the remaining future payments associated with it. c. When the market interest rate is the same as the coupon rate, the value of bond equals the face value. d. The face value and the coupon rate are fixed for the life of the bond. None of the above are false. е.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_forwardCoupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This percentage return is referred to as the bond’s yield. Q1. Yield to maturity (YTM) is the rate of return expected from a bond held until its maturity date. However, the YTM equals the expected rate of return under certain assumptions. Which of the following is one of those assumptions? a. The bond is callable. b. The probability of default is zero. Consider the case of RTE Inc: Q2. RTE Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,130.35. However, RTE Inc. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on RTE Inc.’s bonds? Value YTM ? YTC ? Q3. If interest rates are expected to remain constant, what is the best estimate of the remaining life left for RTE Inc.’s bonds? a. 8 years b. 10…arrow_forward
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