Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 17, Problem 5SP
(Interest rate risk) Two years ago your corporate treasurer purchased, for the firm, a 20-year bond at its par value of $1,000. The coupon rate on this security is 8 percent. Interest payments are made to bondholders once a year. Currently, bonds of this particular risk class are yielding investors 9 percent. A cash shortage has forced you to instruct your treasurer to liquidate the bond.
- a. At what price will your bond be sold? Assume annual compounding.
- b. What will be the amount of your gain or loss over the original purchase price?
- c. What would be the amount of your gain or loss had the treasurer originally purchased a bond with a 4-year rather than a 20-year maturity? (Assume all characteristics of the bonds are identical except their maturity periods.)
- d. What do we call this type of risk assumed by your corporate treasurer?
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you bought a 30-year bonds many years ago. The bond has par value of $ 1,000 and coupon rate of 12%, paid semi-annually. The current price of the bond is $1,137.99 and the yield to maturity is 10%. How many years ago did yoy buy the bond
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The Isabelle Corporation rents prom dresses in its stores across the southern United States. It has just issued a five-year, zero-coupon corporate bond at a price of $62 (assume a $100 face
value bond). You have purchased this bond and intend to hold it until maturity.
a. What is the yield to maturity of the bond?
b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default?
c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value?
d. What is the expected return (expressed as an EAR) if the probability of default is 50% in good times, the likelihood of default is higher in bad times than good times, and, in the case of default, you
will recover 90% of the face value?
e. For parts (b) through (d), what can you say about the five-year, risk-free interest rate in each case?
Note: Assume annual compounding.
C
a. What is the yield to maturity of the bond?
The yield to…
As corporate treasurer, you have to pay $21 million in one year and again in two years. Bonds of all maturities currently yield 7%.
If you buy zero-coupon bonds with a maturity equal to the duration calculated in the previous part, what should be their combined face value (in $)?
Chapter 17 Solutions
Foundations Of Finance
Ch. 17 - Prob. 1RQCh. 17 - Prob. 2RQCh. 17 - Prob. 3RQCh. 17 - What are the two major objectives of the firms...Ch. 17 - Prob. 5RQCh. 17 - Prob. 6RQCh. 17 - Prob. 7RQCh. 17 - Prob. 8RQCh. 17 - Prob. 9RQCh. 17 - Prob. 10RQ
Ch. 17 - Prob. 11RQCh. 17 - Prob. 1SPCh. 17 - Prob. 2SPCh. 17 - Prob. 3SPCh. 17 - (Interest rate risk) Two years ago your corporate...Ch. 17 - Prob. 6SPCh. 17 - Prob. 7SPCh. 17 - Prob. 8SPCh. 17 - Prob. 9SPCh. 17 - Prob. 10SPCh. 17 - Prob. 11SPCh. 17 - Prob. 1MCCh. 17 - Prob. 2MCCh. 17 - Prob. 3MCCh. 17 - Prob. 4MC
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