Basic bond valuation Complex Systems has an outstanding issue of $1,000-par-value bonds with a 11% coupon interest rate. The issue pays interest annually and has 15 years remaining to its maturity datea. If bonds of similar risk are currently eaming a rate of return of 9%, how much should the Complex Systems bond sell for today?b. Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex Systems bond.c. If the required return were at 11% instead of 9%, what would the current value of Complex Systems' bond be? Contrast this finding with your findings in part a and discuss.

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Answered: Basic bond valuation Complex Systems…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You are considering an investment in 20-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T - bills are currently earning 0.50 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:Real risk-free rateDefault risk premiumLiquidity 0.41% = 1.05 % = 0.90% = 0.75% risk premiumMaturity risk premium = a. What is the inflation premium?b. What is the fair interest rate on Moore Corporation 20-year bonds?
Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation) Fingen's 16-year,1000 $ par value bonds pay 13 percent interest annually. The market price of the bonds is $1070 and the market's required yield to maturity on a comparable-risk bond is 14 percent. a. Compute the bond's yield to maturity. b. Determine the value of the bond to you, given your required rate of return. c. Should you purchase the bond? a. What is your yield to maturity on the Fingen bonds given the market price of the bonds? % (Round to two decimal places.)
A plot of the yields on bonds with different terms to maturity but the same risk, liquidity, and tax considerations is known as O A. a yield curve. B. a risk-structure curve. OC. a term-structure curve. 5- O D. an interest-rate curve. Suppose people expect the interest rate on one-year bonds for each of the next four years to be 3%, 6%, 5%, and 6%. If the expectations theory of the term structure of interest rates is correct, then the implied interest rate on bonds with a maturity of four years is nearest whole number). %. (Round your response to the 2- Refer to the figure on your right. Suppose the expected interest rates on one-year bonds for each of the next four years are 4%, 5%, 6%, and 7%, respectively. 1. 1.) Use the line drawing tool (once) to plot the yield curve generated. 3 Term to Maturity in Years 2.) Use the point drawing tool to locate the interest rates on the next four years. 5. 3- Interest Rate .....
Calculate the purchase price of the following bonds. Indicate whether the bonds are priced at a discount, at par or at a premium. Give your answers in dollars and cents to the nearest cent. Face Value Coupon Rate Years to Maturity Market Rate a) $100 r = 6.75% 5 j2 = 6.75% b) $1,000 r = 8% 11 j2 = 6.25% c) $10,000 r = 7% 20 j2 = 8.75% Quoted coupon rates and market rates are nominal annual rates compounded semi-annually. a)Price = $ This bond is priced at:a discountpara premium b)Price = $ This bond is priced at:a discountpara premium c)Price = $ This bond is priced at:a discountpara premium
An investor wants to find the duration of a(n) 15-year, 6% semiannual pay, noncallable bond that's currently priced in the market at $587.05, to yield 12%. Using a 150 basis point change in yield, find the effective duration of this bond (Hint: use Equation 11.11). Question content area bottom Part 1 The new price of the bond if the market interest rate decreases by 150 basis points (or 1.5%) is $enter your response here. (Round to the nearest cent.)
Conceptual Overview: Explore the value of fixed-interest coupon bonds of different terms. This graph shows the value of 10% coupon bonds of different terms across differing market interest rates. Each bond pays INT = $100 at the end of each year and returns M = $1,000 at maturity. For comparison, the blue line depicts the value of a one-year bond. The term of the other bond in years may be changed using the slider. Drag on the graph to change the current market interest rate (rd) at which the bond (orange curve) is evaluated. ∑ t = 1 Y r s I N T ( 1 + r d ) + M ( 1 + r d ) = ∑ t = 1 1 5 $ 1 0 0 ( 1 + 0 . 1 0 0 ) + $ 1 0 0 0 ( 1 + 0 . 1 0 0 ) = 1 , 0 0 0 ∑ t=1 Yrs (1+r d ) t INT + (1+r d ) Yrs M =∑ t=1 15 (1+0.100) t $100 + (1+0.100) 15 $1000 =1,000 ∑t=1Yrs(1+rd)tINT+(1+rd)YrsM=∑t=115(1+0.000)t$100+(1+0.000)15$1000=2,500. 1. What is the value of a 15-year 10% $1,000 coupon bond when the market interest rate is 15%? $421$708$1,000$1,5192. What is the value of a 12-year 10% $1,000…
Exploring Finance: Coupon Bonds. Coupon Bonds Conceptual Overview: Explore the value of fixed-interest coupon bonds of different terms. This graph shows the value of 10% coupon bonds of different terms across differing market interest rates. Each bond pays INT = $100 at the end of each year and returns M = $1,000 at maturity. For comparison, the blue line depicts the value of a one-year bond. The term of the other bond in years may be changed using the slider. Drag on the graph to change the current market interest rate (rd) at which the bond (orange curve) is evaluated. 5. For a 10%, $1,000 coupon bond, a longer term bond (say, 15 years) is: less affected by changes in the market rate than a 1-year bond. affected the same by changes in the market rate than a 1-year bond. more affected by changes in the market rate than a 1-year bond. Cannot be determined.
Provide table solutions
i. Calculate the value of Macaulay’s duration for a 10-year, $1000 par value bond purchased today at a yield to maturity of 14% and a coupon rate of 10%. ii. From the answer in (i) calculate the modified duration of the bond assuming the prevailing interest rate is still 14%.iii. Now suppose the market interest rate on comparable bonds falls to 13 percent. What will be the approximate percentage change in the bond price.? (Hint: use the modified duration for your computation in (ii))
D Bond P is a premium bond with a 9 percent coupon. Bond D is a 4 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 6 percent, and have four years to maturity. What is the current yield for Bond P and Bond D? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Bond P Bond Current yield 8.15% 4.30 % If interest rates remain unchanged, what is the expected capital gains yield over the next year for Bond P and Bond D? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))) Bond P Bond D Capital gains yield -2.15 % 1.70 %
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