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 7PS
a)
Summary Introduction
To calculate: New yield to maturity.
b)
Summary Introduction
To calculate:
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This first table describes prevailing market interest rates.
Market Data
Yield
0.05
Required:
Using the yield above and the information contained in the table below, please calculate the price and duration of the bond as well as all necessary steps.
(Use cells A5 to B5 from the given information to complete this question.)
Time Until Payment
Payment
Discounted Payment
Weight
Time × Weight
1.00
$30.00
2.00
$30.00
3.00
$30.00
4.00
$1,030.00
Price:
Duration
Unlike the coupon interest rate, which is fixed, a bond's yield varies from day to day depending on market conditions. To be most useful, it should give us an estimate of the rate of return an investor
would earn if that investor purchased the bond today and held it for its remaining life. There are three different yield calculations: Current yield, yield to maturity, and yield to call.
A bond's current yield is calculated as the annual interest payment divided by the current price. Unlike the yield to maturity or the yield to call, it does not represent the actual return that investors
should expect because it does not account for the capital gain or loss that will be realized if the bond is held until it matures or is called. This yield was popular before calculators and computers came
along because it was easy to calculate; however, because it can be misleading, the yield to maturity and yield to call are more relevant.
The yield to maturity (YTM) is the rate of return earned on a…
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Problem Walk-Through
Last year Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065 and it
sells for $1,200.
a. What are the bond's nominal yield to maturity and its nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.
YTM:
%
YTC:
%
Would an investor be more likely to earn the YTM or the YTC?
-Select-
-Select-
ent yield and to Table 7.1) Round your answer to two decimal places.
b.
Since the YTM is above the YTC, the bond is likely to be called.
Since the YTC is above the YTM, the bond is likely to be called.
Since the YTM is above the YTC, the bond is not likely to be called.
Since the YTC is above the YTM, the bond is not likely to be called.
Since the coupon rate on the bond has declined, the bond is not likely to be called.
I. If the bond is called, the capital gains yield will remain the same but the current yield will be…
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
- Explain what you see from the pricing calculations. How do the two bonds differ? Bond C Bond Price = PV(rate,nper,pmt,fv) Given: n = Period which takes values from 0 to the nth period = 0,1,2,3 & 4 Cn = Coupon payment in the nth period = 10%*$1,000 = $100 YTM = interest rate or required yield = 9.6% P = Par Value of the bond = $1,000 Bond Z Bond Price = PV(rate,nper,pmt,fv) Given: n = Period which takes values from 0 to the nth period = 0,1,2,3 & 4 Cn = Coupon payment in the nth period = 0%*$1,000 = $0.00 YTM = interest rate or required yield = 9.6% P = Par Value of the bond = $1,000 years Bond A Bond Z 4 $1,012.79 $693.04 3 $1,010.02 $759.57 2 $1,006.98 $832.49 1 $1,003.65 $912.41 0 $1,000.00 $1,000.00arrow_forward4. Given the expectations theory as the correct interpretation of the term structure, calculate and depict the yield curves for the provided series of one-year interest rates: 5%, 7%, 7%, 7%, 7% 5%, 4%, 4%, 4%, 4% a. b. How would your yield curves change if people preferred shorter-term bonds over longer- term bonds? Solution:arrow_forwardSuppose 2-year Treasury bonds yield 4.1%,while 1-year bonds yield 3.2%. r* is 1%, and the maturity risk premium is zero.a. Using the expectations theory, what is the yield on a 1-year bond, 1 year from now?Calculate the yield using a geometric average.b. What is the expected inflation rate in Year 1? Year 2?arrow_forward
- Suppose we observe the following rates: 1R1 = 6.7, 1R2 = 7.4, and E(2r1) = 6.7. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2? Please step by step.arrow_forwardConsider the following pure discount bonds with face value $1,000: Maturity Price 1 952.38 2 898.47 3 847.62 4 799.64 5 754.38 a). Find the spot rates and draw a yield curve.b). Assume that there is a constant liquidty premium that is equal to 1% across all maturities. Find the forward rates and the expected one period future interest rates.arrow_forwardAssume that the real risk-free rate is 2% and the average annual expected inflation rate is 4%. The DRP and LP for Bond A are each 2%, and the applicable MRP is 3%. What is Bond A's interest rate?arrow_forward
- Assume the real risk-free is 1% and the average annual expected inflation rate is 4%. The DRP and LP for bond A are each 3%, and the applicable MRP is 3%. What is Bond A's interest rate?arrow_forwardCalculate the approximate price change for this bond using both duration and convexity in the computation, assuming yield to maturity declined by 200 basis points. What is the new price of the bond if it was $1010 before the yield changes?arrow_forwardplease understand i will give upvotes no chatgpt plsarrow_forward
- The following information about bonds A, B, C, and D are given. Assume that bond prices admit noarbitrage opportunities. What is the convexity of Bond D?Cash Flow at the end ofBond Price Year 1 Year 2 Year 3A 91 100 0 0B 86 0 100 0C 78 0 0 100D ? 5 5 105arrow_forwardAssume that the real risk free rate is 3% and the average annual expected inflation rate is 5%. The DRP and LP for Bond A are each 1% and the applicable MRP is 2%. What is bond A’s interest rate?arrow_forwardWhich of the following about the Yield to Maturity is (are) true? 1. YtM is the rate that will make the present value of the cash flows equal to the price 2. For a semiannual bond, doubling the periodic interest rate results in the YtM. Only I ◇ Neither I nor II Only II Both I and IIarrow_forward
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