EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 5, Problem 19PROB
Summary Introduction
Yield:
Yield is the return to be earned from an investment, if hold it for a specific period.
Yield includes payment of interest or dividend but does not include capital appreciation.
Calculate the yield as follows:
Given one year Treasury bond rate is 3.2%. Bond T matures in five years and yield is 5.3% and bond Q matures in 8 years and yield is 5.9%. Both bonds has same default risk and does not have liquidity premium.
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Suppose that the yield curve shows that the one-year bond yield is 8 percent, the two-year yield is 7 percent, and the three-year yield
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risk premium on the three-year bond is 2 percent.
a. What are the expected one-year interest rates next year and the following year?
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The expected one-year interest rate the following year
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%
%
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maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%,
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O 6.75%
O 8.90%
O 4.30%
O 7.05%
What is the yield on a 4-year BBB-rated bond?
O 7.50%
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If the yield on a 5-year Treasury bond is 7.38% and the yield on a 6-year Treasury bond is 7.83%, the expected inflation in 6 years is
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1. Consider two bonds with a similar credit rating and pay the same coupon rate
per annum. The terms to maturity for Bond A and Bond B are 5 years and 10
years respectively. If inflation rate is expected to increase in the near future and
therefore leads to an increase in interest rate, what is the effect on the bond
prices? Which bond is likely to experience a larger effect due to the increase in
interest rate? Briefly explain your answer.
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