Corporate Finance
Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 6, Problem 18P
Summary Introduction

To determine: The price of the five year zero-coupon bond.

Introduction: A bond is a debt instrument with which the shareholder credits the cash to an entity which can be a government or an organization that scrounges finance for a distinct timeframe at a predefined interest rate. Coupon rate is expressed as an interest rate on a fixed income security similar to a bond. It is also known as the interest rate that the bondholders get from their investment. It depends on the yield depending on the day the bond is issued.

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What is the price of a five year zero-coupon, default free security with a face value of $1000.
A.Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 6.60%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.   a. 9.70%   b. 9.12%   c. 8.83%   d. 8.54%   e. 7.47% B. Beranek Corp has $625,000 of assets (which equal total invested capital), and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?   a. $262,500   b. $202,500   c. $250,000   d. $195,000   e. $212,500
The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in another one-year CD after one year. True O False The yield on a one-year Treasury security is 4.6900%, and the two-year Treasury security has a 7.0350% yield. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? O 9.4500% O 10.7730% O 8.0325% O 12.0015%

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Corporate Finance

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