Longer-term bonds: Bonds with long maturity period are called as longer-term bonds. These bonds carry high risk because an alteration in the interest rate or probability of higher inflation in the economy over a longer period can reduce bond’s price. Shorter term bonds Bonds with short maturity period are called as shorter-term bonds. Short duration reduces the risk as well as interest rates on these bonds. An investor who aims to earn the profit between the redemption value and investment cost will invest in shorter-term bonds. Interest rate The interest rate is simply the rate at which annual coupon payment is made by the issuer of a bond. The rate is set at the time of issue of the bond and the same rate is mentioned in the bond certificate. To determine: The sensitivity of longer-term bonds in comparison to shorter-term bonds with changes in interest

Question

Want to see the full answer?

Answer 1

Question

Chapter 6, Problem 7CT

Summary Introduction

Longer-term bonds:

Bonds with long maturity period are called as longer-term bonds. These bonds carry high risk because an alteration in the interest rate or probability of higher inflation in the economy over a longer period can reduce bond’s price.

Shorter term bonds

Bonds with short maturity period are called as shorter-term bonds. Short duration reduces the risk as well as interest rates on these bonds. An investor who aims to earn the profit between the redemption value and investment cost will invest in shorter-term bonds.

Interest rate

The interest rate is simply the rate at which annual coupon payment is made by the issuer of a bond. The rate is set at the time of issue of the bond and the same rate is mentioned in the bond certificate.

To determine:

The sensitivity of longer-term bonds in comparison to shorter-term bonds with changes in interest

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Replacement Analysis The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $75,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $7,500 per year for each year of its remaining life. As older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life. A new high-efficiency digital-controlled flange-lipper can be purchased for $130,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The old machine can be sold today for $50,000. The firm's tax rate is 25%, and the…

The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $700 for 5 years and $350 for the sixth year. Its current book value is $3,850, and it can be sold on an Internet auction site for $4,440 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life. Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $12,300, and has an estimated useful life of 6 years with an estimated salvage value of $1,200. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine's much greater efficiency would reduce operating expenses by $1,800 per year. To support the…

St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $181,500 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $28,000 to $78,500 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 25%, and the project cost of capital is 13%. What is the NPV if the firm replaces the old welder with the new one? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign.