Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134408897
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 6, Problem 13P
Consider the following bonds:
| Bond | Coupon Rate (annual payments) | Maturity (years) |
| A | 0% | 15 |
| B | 0% | 10 |
| C | 4% | 15 |
| D | 8% | 10 |
- a. What is the percentage change in the price of each bond if its yield to maturity falls from 6% to 5%?
- b. Which of the bonds A-D is most sensitive to a 1% drop in interest rates from 6% to 5% and why? Which bond is least sensitive? Provide an intuitive explanation for your answer.
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Students have asked these similar questions
Consider the following bonds.
Bond
A
B
с
D
Coupon Rate (annual payments)
0.0%
0.0%
3.5%
7.8%
Maturity (years)
10
15
15
10
Which of the bonds A to D is most sensitive to a 1% drop in interest rates from 6.7% to 5.7%? Which bond is least sensitive?
Provide an intuitive explanation for your answer.
Calculating the risk premium on bonds
The text presents a formula where
(1+1) = (1-p)(1 +i+x) + p(0)
where i is the nominal interest rate on a riskless bond
x is the risk premium
p is the probability of default (bankruptcy)
If the probability of bankruptcy is zero, the rate of interest on the risky bond is
When the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%, the probability of bankruptcy is %. (Round your response to two decimal places.)
When the probability of bankruptcy is 6% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.)
When the probability of bankruptcy is 11% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.)
The formula assumes that payment upon default is zero. In fact, it is often positive.
How would you change the formula in this case?…
Consider the following bonds: (Click on the following icon in order to copy its contents into a spreadsheet.)
Coupon Rate (annual payments)
Maturity (years)
13
0%
0%
12
2%
13
8%
12
Bond
A
B
C
D
a. What is the percentage change in the price of each bond if its yield to maturity falls from 8% to 7%?
b. Which of the bonds A through D is the most sensitive to a 1% drop in interest rates from 8% to 7% and why? Which bond is the least sensitive? Provide an intuitive explanation for your answer.
Note: Assume annual compounding.
a. What is the percentage change in the price of each bond if its yield to maturity falls from 8% to 7%?
The percentage change in bond A is 5.47%. (Round to two decimal places.)
Chapter 6 Solutions
Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 6.1 - What is the relationship between a bonds price and...Ch. 6.1 - The risk-free interest rate for a maturity of...Ch. 6.2 - If a bonds yield to maturity does not change, how...Ch. 6.2 - Prob. 2CCCh. 6.2 - How does a bonds coupon rate affect its...Ch. 6.3 - How do you calculate the price of a coupon bond...Ch. 6.3 - How do you calculate the price of a coupon bond...Ch. 6.3 - Explain why two coupon bonds with the same...Ch. 6.4 - There are two reasons the yield of a defaultable...Ch. 6.4 - What is a bond rating?
Ch. 6.5 - Why do sovereign debt yields differ across...Ch. 6.5 - What options does a country have if it decides it...Ch. 6 - A 30-year bond with a face value of 1000 has a...Ch. 6 - Assume that a bond will make payments every six...Ch. 6 - The following table summarizes prices of various...Ch. 6 - Suppose the current zero-coupon yield curve for...Ch. 6 - Prob. 5PCh. 6 - Prob. 6PCh. 6 - Suppose a five-year, 1000 bond with annual coupons...Ch. 6 - Prob. 8PCh. 6 - Explain why the yield of a bond that trades at a...Ch. 6 - Prob. 10PCh. 6 - Prob. 11PCh. 6 - Consider the following bonds: Bond Coupon Rate...Ch. 6 - Prob. 14PCh. 6 - Prob. 17PCh. 6 - Prob. 18PCh. 6 - Prob. 19PCh. 6 - Prob. 20PCh. 6 - Prob. 22PCh. 6 - Prob. 23PCh. 6 - Suppose you are given the following information...Ch. 6 - Prob. 26PCh. 6 - Grumman Corporation has issued zero-coupon...Ch. 6 - The following table summarizes the yields to...Ch. 6 - Prob. 30PCh. 6 - Prob. 31PCh. 6 - A BBB-rated corporate bond has a yield to maturity...Ch. 6 - Prob. 33PCh. 6 - Prob. 34PCh. 6 - Prob. 35P
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