PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Question
Chapter 3, Problem 14PS
Summary Introduction
To determine: The duration and modified duration.
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Question 4
Complete the following table and draw a graph showing how bond price for each bond changes over time as they move towards their maturity dates. Describe the relationship between bond prices and time remaining for maturity.
Please include graph as per above information
Years remaining to maturity
BOND A
Coupon. rate = 8% p.a. Market interest rate = 6% p.a.
BOND B Coupon rate = 6% p.a. Market interest rate = 6% p.a.
BOND C Coupon rate = 4% p.a. Market interest rate = 6% p.a.
10
9
8
7
6
5
4
3
2
1
0
This first table describes prevailing market interest rates.
Market Data
Yield
0.05
Required:
Using the yield above and the information contained in the table below, please calculate the price and duration of the bond as well as all necessary steps.
(Use cells A5 to B5 from the given information to complete this question.)
Time Until Payment
Payment
Discounted Payment
Weight
Time × Weight
1.00
$30.00
2.00
$30.00
3.00
$30.00
4.00
$1,030.00
Price:
Duration
Calculate YTC using a financial calculator by entering the number of payment periods until call for N, the price of the bond for PV, the interest payments for PMT, and the call price for FV. Then you can solve for 1/YR YTC. Again, remember you need to
make the appropriate adjustments for a semiannual bond and realize that the calculated 1/YR is on a periodic basis so you will need to multiply the rate by 2 to obtain the annual rate. In addition, you need to make sure that the signs for PMT and
FV are identical and the opposite sign is used for PV; otherwise, your answer will be incorrect.
A company is more likely to call its bonds if they are able to replace their current high-coupon debt with less expensive financing. A bond is more likely to be called if its price is above par-because this means that the going market interest
rate is less than its coupon rate.
Quantitative Problem: Ace Products has a bond issue outstanding with 15 years remaining to maturity, a coupon rate of 8.4%…
Chapter 3 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 3 - (PRICE) In February 2009, Treasury 8.5s of 2020...Ch. 3 - (YLD) On the same day, Treasury 3.5s of 2018 were...Ch. 3 - (DURATION) What was the duration of the Treasury...Ch. 3 - (MDURATION) What was the modified duration of the...Ch. 3 - Bond prices and yields A 10-year bond is issued...Ch. 3 - Bond prices and yields The following statements...Ch. 3 - Bond prices and yields Construct some simple...Ch. 3 - Bond prices and yields A 10-year German government...Ch. 3 - Bond prices and yields A 10-year German government...Ch. 3 - Bond prices and yields A 10-year U.S. Treasury...
Ch. 3 - Bond returns If a bonds yield to maturity does not...Ch. 3 - Bond returns a. An 8%, five-year bond yields 6%....Ch. 3 - Prob. 10PSCh. 3 - Duration True or false? Explain. a....Ch. 3 - Duration Here are the prices of three bonds with...Ch. 3 - Duration Calculate the durations and volatilities...Ch. 3 - Prob. 14PSCh. 3 - Duration Find the spreadsheet for Table 3.4 in...Ch. 3 - Prob. 16PSCh. 3 - Spot interest rates and yields Which comes first...Ch. 3 - Prob. 18PSCh. 3 - Spot interest rates and yields Look again at Table...Ch. 3 - Prob. 20PSCh. 3 - Spot interest rates and yields Assume annual...Ch. 3 - Spot interest rates and yields A 6% six-year bond...Ch. 3 - Spot interest rates and yields Is the yield on...Ch. 3 - Prob. 24PSCh. 3 - Measuring term structure The following table shows...Ch. 3 - Term-structure theories The one-year spot interest...Ch. 3 - Term-structure theories Look again at the spot...Ch. 3 - Real interest rates The two-year interest rate is...Ch. 3 - Prob. 30PSCh. 3 - Bond ratings A bonds credit rating provides a...Ch. 3 - Prob. 32PSCh. 3 - Price and spot interest rates Find the arbitrage...Ch. 3 - Prob. 34PSCh. 3 - Prices and spot interest rates What spot interest...Ch. 3 - Prices and spot interest rates Look one more time...
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