Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 6, Problem 3MC
Use the scenario data to calculate the expected
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) Consider buying a 1000 pbr bond at the market price of 800 pbr. The bond paysdividends semiannually at a rate of 8% per year over 10 years (i.e. The bond matures in 10 years).(a) Calculate the coupon rate?(b) Calculate the dividend amounts /Coupon interest payments.(c) Draw the cash flow diagram for the bond investment.(d) Calculate the effective annual yield.
An analyst evaluating securities has obtained the following information. The real rate of interest is 2.4% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.3% next year, 3.3% the following year, 4.3% the third year, and 5.3% every year thereafter. The maturity risk premium is estimated to be 0.1 × (t – 1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%.
a. What is the yield on a 1-year T-bill? Round your answer to one decimal place.
b. What is the yield on a 5-year T-bond? Round your answer to one decimal place.
c. What is the yield on a 5-year corporate bond? Round your answer to one decimal place.
Consider a 25-year coupon bond which has a face value of $500 and a 5% coupon rate. Its current price is $500. The interest on this bond is expected to go up from 5% to 10% next year.
a) Calculate the current yield of this 25-year coupon bond.
b) Using the coupon bond pricing formula, calculate the expected price at which this bond will be sold next year.
c) Calculate the expected rate of return if you buy the bond today and sell it next year.
d) Are you going to invest on this bond if your investment horizon is just one year? Explain why or why not.
Chapter 6 Solutions
Financial Management: Theory & Practice
Ch. 6 - The probability distribution of a less risky...Ch. 6 - Security A has an expected return of 7%, a...Ch. 6 - If investors’ aversion to risk increased, would...Ch. 6 - Prob. 5QCh. 6 - Your investment club has only two stocks in its...Ch. 6 - Prob. 2PCh. 6 - Suppose that the risk-free rate is 5% and that the...Ch. 6 - An analyst gathered daily stock returns for...Ch. 6 - A stocks return has the following distribution:...Ch. 6 - The market and Stock J have the following...
Ch. 6 - Suppose rRF = 5%, rM = 10%, and rA = 12%. a....Ch. 6 - As an equity analyst you are concerned with what...Ch. 6 - Your retirement fund consists of a $5,000...Ch. 6 - Prob. 10PCh. 6 - You have a $2 million portfolio consisting of a...Ch. 6 - Stock R has a beta of 1.5, Stock S has a beta of...Ch. 6 - You are considering an investment in either...Ch. 6 - You have observed the following returns over...Ch. 6 - What are investment returns? What is the return on...Ch. 6 - Graph the probability distribution for the bond...Ch. 6 - Use the scenario data to calculate the expected...Ch. 6 - What is the stand-alone risk? Use the scenario...Ch. 6 - Your client has decided that the risk of the bond...Ch. 6 - Your client is shocked at how much risk Blandy...Ch. 6 - Explain correlation to your client. Calculate the...Ch. 6 - Prob. 8MCCh. 6 - Prob. 9MCCh. 6 - Prob. 10MCCh. 6 - Prob. 11MCCh. 6 - Calculate the correlation coefficient between...Ch. 6 - Prob. 13MCCh. 6 - (1) Suppose the risk-free rate goes up to 7%. What...Ch. 6 - Your client decides to invest $1.4 million in...Ch. 6 - Jordan Jones (JJ) and Casey Carter (CC) are...Ch. 6 - What does market equilibrium mean? If equilibrium...Ch. 6 - What is the Efficient Markets Hypothesis (EMH),...
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- What is the stand-alone risk? Use the scenario data to calculate the standard deviation of the bonds return for the next year.arrow_forwardWhat is the stand-alone risk? Use the scenario data to calculate the standard deviation of the bonds return for the next year.arrow_forwardAn analyst evaluating securities has obtained the following information. The real rate of interest is 2.9% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.4% next year, 3.4% the following year, 4.4% the third year, and 5.4% every year thereafter. The maturity risk premium is estimated to be 0.1 × (t – 1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%. a. What is the yield on a 1-year T-bill? Round your intermediate calculations and final answer to two decimal places. % b. What is the yield on a 5-year T-bond? Round your intermediate calculations and final answer to two decimal places. % c. What is the yield on a 5-year corporate bond? Round your intermediate calculations and final answer to two decimal places. %arrow_forward
- 4) The table below shows the interest rates available from investing in risk-free U.S. Treasury securities with different terms to maturity. Put another way, the table below presents the current spot yield curve. What is the present value (PV) of an investment that promises to pay $4,000 at the end of each year for the next four years with the first cash flow being paid one year from today? (provide your answer in the space below) Term in years: Rate: 1 1.8% 2 3 4 2.25% 2.30% 2.66% The Present Value of the annuity described above is: 5 3.13%arrow_forwardAssuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting yield curves for the following paths of one-year interest rates over the next four years: 3%, 5%, 13%, 15%arrow_forwardAn analyst evaluating securities has obtained the following information. The real rate of interest is 2.7% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.1% next year, 3.1% the following year, 4.1% the third year, and 5.1% every year thereafter. The maturity risk premium is estimated to be 0.1 x (t-1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%. a. What is the yield on a 1-year T-bill? Do not round intermediate calculations. Round your answer to one decimal place. 4.80 % Show All Feedback b. What is the yield on a 5-year T-bond? Do not round intermediate calculations. Round your answer to one decimal place. 6.99 % Show All Feedback c. What is the yield on a 5-year corporate bond? Do not round intermediate calculations. Round your answer to one decimal place. 8.49 % Show All Feedback xarrow_forward
- Ross Law is pondering on the following data. Three-year Treasury securities currently yield 6%, while 4 year treasury security yield 6.5%. Assume that the expectations theory holds, what does the market believe the rate will be on a 1-year treasury security, three years from now?arrow_forwardAn analyst evaluating securities has obtained the following information. The real rate of interest is 3% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.8% next year, 3.8% the following year, 4.8% the third year, and 5.8% every year thereafter. The maturity risk premium is estimated to be 0.1 x (t-1) %, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%. a. What is the yield on a 1-year T-bill? Round your answer to one decimal place. % b. What is the yield on a 5-year T-bond? Round your answer to one decimal place. % c. What is the yield on a 5-year corporate bond? Round your answer to one decimal place. %arrow_forwardBond valuation related problems should be solved by using a financial calculator or MS excel spreadsheet. Accordingly, you must show the values of all relevant time valu of money variables If D1 = $1.50 g (which is constant) = 6.5%, Po = $56, what is the stock's expected capital gains yield for the coming year?arrow_forward
- Suppose the term structure of risk-free interest rates is as shown here: a. Calculate the present value of an investment that pays $1,000 in 2 years and $4,000 in 5 years for certain. b. Calculate the present value of receiving $900 per year, with certainty, at the end of the next 5 years. To find the rates for the missing years in the table, linearly interpolate between the years for which you do know the rates. (For example, the rate in year 4 would be the average rate in year 3 and year 5.) c. Calculate the present value of receiving $2,700 per year, with certainty, for the next 20 years. Infer rates for the missing years using linear interpolation. (Hint: Use a spreadsheet.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) 2 years 3 years 5 years 7 years 1 year 2.06 2.44 2.64 3.22 3.74 Term Rate (EAR, %) Print Done 10 years 4.25 20 years 5.09 I X t cent.)arrow_forwardSuppose today you buy a coupon bond that you plan to sell one year later. Which of the rate of return formula incorporates future changes into the bond's price?arrow_forwardThe graph (attached) depicts yield curves for 5 November 2021, 5 November, 2022, and 5 November, 2019. The yield rates are given for each of those in the graph. a) As of today, what is the one-year interest rate expected by financial market participants for November 5, 2023? Does it appear that financial market participants are currently expecting changes in monetary policy within the next two years?arrow_forward
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