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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Question
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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Students have asked these similar questions
Required:
The market price of a security is $56. Its expected rate of return is 12%. The risk-free rate is 5%, and the market risk premium is 9%.
What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assume the stock is
expected to pay a constant dividend in perpetuity. (Round your answer to 2 decimal places.)
> Answer is complete but not entirely correct.
Market price
$ 36.37 X
8. Given the following information what must be the risk-free rate of interest (assume the asset is properly
priced)? The expected return of the market is 14.25%, the stock's B is.82 and the expected return of the
asset is 12.89%.
A.5.91%
B. 6.69%
C. 7.41%
D. 8.93%
17. Consider two securities that pay risk-free cash flows over the next two years and that have the
current market prices shown here:
Security
Price Today
Cash Flow in One Year
Cash Flow in Two Years
В1
$192
$200
B2
$176
$200
a. What is the no-arbitrage price of a security that pays cash flows of $200 in one year
$200 in two years?
b. What is the no-arbitrage price of a security that pays cash flows of $200 in one year and
$1600 in two years?
c. Suppose a security with cash flows of $100 in one year and $200 in two years is trading for
price of $260. What arbitrage opportunity is available?
and
a
Chapter 6 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
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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Similar questions
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- (Please type answer no write by hend)arrow_forwardSuppose 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.arrow_forwardQ24. A particular security's equilibrium rate of return is 10%. For all securities, the inflation premium is 2.00% and the risk free rate is 4.0%. The security's liquidity risk premium is 0.25% and maturity risk premium is 1.00%. The security has no special covenants. Calculate the security's default risk premium.arrow_forward
- Calculate the implied volatility on a security given the following information: a call option on the security has a premium of 3.5p, the security itself is trading at 50p, the call has an exercise price of 51p and has 120 days to maturity, and the riskless interest rate is 12 per cent. Calculate the implied volatility on a security given the following information: a call option on the security has a premium of 3.5p, the security itself is trading at 50p, the call has an exercise price of 51p and has 120 days to maturity, and the riskless interest rate is 12 per cent.arrow_forwardSuppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, 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, hence the pure expectations theory is NOT valid. What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. Group of answer choicesarrow_forwardThe market price of a security is $50. Its expected rate of return is 10%. The risk-free rate is 5%, and the market risk premium is 8%. What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assume the stock is expected to pay a constant dividend in perpetuity. (Round your answer to 2 decimal places.)arrow_forward
- Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 4.00%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Include the cross-product term, i.e., if averaging is required, use the geometric average. (Round your final answer to 2 decimal places.)arrow_forwardSuppose you observe the following situation: Security Beta Expected Return Peat Company 1.70 13.60 Re - Peat Company 0.85 10.80 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk - free rate?arrow_forwardsk 21. Consider the following balance sheet (in millions) for an FI: Assets Liabilities Duration 10 years $950 Duration = 2 years Equity $860 90 a. What is the Fl's duration gap? b. What is the FI's interest rate risk exposure? c. How can the FI use futures and forward contracts to put on a macrohedge? d. What is the impact on the FI's equity value if the relative change in interest rates is an increase of 1 percent? That is, A R/(1 + R) = 0.01. e. Suppose that the FI macrohedges using Treasury bond futures that are cur- rently priced at 96. What is the impact on the FI's futures position if the relative change in all interest rates is an increase of 1 percent? That is, AR/(1 + R) = 0.01. Assume that the deliverable Treasury bond has a duration of nine years. f. If the FI wants to macrohedge, how many Treasury bond futures contracts does it need?arrow_forward
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