Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 30, Problem 11P
Summary Introduction
To rank: The securities from lowest to highest duration.
Introduction:
The duration of the securities are equal to the weighted average maturity of the cash flow.
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The calculation for the effective interest rate method begins with applying the coupon rate to:
The face value of the bond divided equally by year.
The maturity value of the bond.
The compound interest rate.
The carrying value at the start of the period.
The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of the face value):
a. Compute the yield to maturity for each bond.
b. Plot the zero-coupon yield curve (for the first five years).
c. Is the yield curve upward sloping, downward sloping, or flat?
a. Compute the yield to maturity for each bond.
The yield on the 1-year bond is 3.92 %. (Round to two decimal places.)
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Maturity (years)
Price (per $100 face value)
1
$95.51
2
3
$91.10
$86.55
$81.69
$76.45
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Donday
Explain the relation between current and future expected one-year bond yields and the yield on a five-year bond.
Chapter 30 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 30.1 - How can insurance add value to a firm?Ch. 30.1 - Prob. 2CCCh. 30.2 - Prob. 1CCCh. 30.2 - What are the potential risks associated with...Ch. 30.3 - How can firms hedge exchange rate risk?Ch. 30.3 - Prob. 2CCCh. 30.4 - How do we calculate the duration of a portfolio?Ch. 30.4 - How do firms manage interest rate risk?Ch. 30 - The William Companies (WMB) owns and operates...Ch. 30 - Genentechs main facility is located in South San...
Ch. 30 - Prob. 3PCh. 30 - Your firm faces a 9% chance of a potential loss of...Ch. 30 - BHP Billiton is the worlds largest mining firm....Ch. 30 - Prob. 6PCh. 30 - Prob. 7PCh. 30 - Prob. 9PCh. 30 - Prob. 10PCh. 30 - Prob. 11PCh. 30 - You have been hired as a risk manager for Acorn...Ch. 30 - Prob. 13PCh. 30 - Prob. 14P
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- Which of the following securities has the lowest interest rate risk? 5% bond, 20-year maturity 5% bond, 10-year maturity 6% bond, 10-year maturity 6% bond, 20-year maturityarrow_forwardConsider a $1,000-par-value Bond with the following characteristics: a current market price of $761, 12 years until maturity, and an 8% coupon rate. We want to determine the discount rate that sets the present value of the bond’s expected future cash-flow stream to the bond’s current market price. You are required to determine the discount rate that equates the present value of the bond?arrow_forwardConsider the following figure which shows the relationship between a three-year bond’s price (vertical axis) and the passage of time (measured in years - horizontal axis). Which of the following statements are consistent with the figure above? Group of answer choices A. This bond pays a coupon of $6. B. This pattern of prices is consistent with a bond whose yield to maturity is below the bond’s coupon rate. C. None of the other statements are correct. D. This bond pays coupons on a quarterly basis.arrow_forward
- Compute the Macaulay duration under the following conditions: a. A bond with a four-year term to maturity, a 10 percent coupon (annual payments), and a market yield of 8 percent. b. A bond with a four-year term to maturity, a 10 percent coupon (annual payments), and a market yield of 12 percent. c. Compare your answers to parts (a) and (b), and discuss the implications of this for classical immunization.arrow_forwardPlease see attached. Definitions: Coupon is the regular interest payment of a bond. Coupon rate is the interest rate for the bond coupons, expressed in annual percentage terms. Par value is the principal amount to be repaid at the maturity of the bond. Yield to maturity (YTM) is the return the bond holder receives on the bond if held to maturity. Maturity date is the expiration date of the bond on which the final interest payment is made as well as the principal repayment.arrow_forwardSuppose you want to figure out the relationship between duration and maturity, so you consider the following three T-Bonds. You compute a. The duration of a two-year Treasury bond with a 10 percent semiannual coupon selling at par b. The duration of a three-year Treasury bond with a 10 percent semiannual coupon selling at par c. The duration of a four-year Treasury bond with a 10 percent semiannual coupon selling at pararrow_forward
- Assume investors are indifferent among security maturities. Today, the annualized 2- year interest rate is 2.20 percent, and the 1-year interest rate is 2 percent. What is the forward rate according to the pure expectations theory? O 2.25% O 2.00% O 2.40% O 2.20%arrow_forwardSuppose a ten-year, $1,000 bond with an 8.1% coupon rate and semiannual coupons is trading for $1,034.23.arrow_forwardConsider an A-rated bond and a B-rated bond. Assume that the one-year probabilities of default for the A- and B-rated bonds are 1% and 3%, respectively, and that default correlation between the two bonds is 20%. What is the joint probability of default of the two bonds?arrow_forward
- Assume that the current yield on one-year securities is 7 percent, and that the yield on a two-year security is 8 percent. If the liquidity premium on a two-year security is 0.6 percent, then the one-year forward rate is approximately: Group of answer choices 8.6 percent. 7.4 percent. 8.4 percent. 7.6 percent.arrow_forwardThe bond's annual coupon rate divided by its market price is referred to as the Multiple Choice yield to call. yield to maturity. current yield. term structure of interest rates.arrow_forwardThe following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of the face value): Maturity (years) Price (per $100 face value) 1 $96.32 a. Compute the yield to maturity for each bond. b. Plot the zero-coupon yield curve (for the first five years). c. Is the yield curve upward sloping, downward sloping, or flat? a. Compute the yield to maturity for each bond. The yield on the 1-year bond is %. (Round to two decimal places.) 2 $91.93 3 $87.36 4 5 $82.57 $77.42arrow_forward
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