Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 3, Problem 29PS
Summary Introduction
To determine: The effects on price of bond A and bond B.
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A bond's credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 7.5% A-rated bonds sell at yields of 8% A10-year bond with a coupon rate of 7% is trading at 96.55, which represents a yield of 7.5%. If it is downgraded by Moody's from Aa to A rating, will its price rise or fall? What will the price be before and after?
Exercise: Dirty/cleanPrice calculation
A bond has face value of $1000. The bond’s yield to maturityis 6% andthe annual coupon rate is 8% with semiannual coupon payments.The maturity of the bond is 5years. The bond was issued on 1/1/2017, and one bought on 4/1/2018.
Answer the following three questions:
a.What is the dirty price of the bond?
b.What is the accrual interest of the bond?
c.What is its clean price?
Risks of investing in bonds
A security with higher risk will have a higher expected return. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important.
The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates.
Q1. Based on the graph, which of the following statements is true?
a. Neither bond has any interest rate risk.
b. The 10-year bond has more interest rate risk.
c. Both bonds have equal interest rate risk.
d. The 1-year bond has more interest rate risk.
Q2. Which type of bonds offer a higher yield?
a. Noncallable bonds
b. Callable bonds
Q3. Answer the following question based on your understanding of interest rate risk and reinvestment risk.
True or False: Assuming all else is equal, the shorter a bond’s maturity, the more its price will change in response to a given change in interest rates.…
Chapter 3 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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 - Prob. 1PSCh. 3 - Bond prices and yields The following statements...Ch. 3 - Prob. 3PSCh. 3 - Bond prices and yields A 10-year German government...Ch. 3 - Bond prices and yields Construct some simple...Ch. 3 - Spot interest rates and yields Which comes first...
Ch. 3 - Prob. 7PSCh. 3 - Spot interest rates and yields Assume annual...Ch. 3 - Prob. 9PSCh. 3 - Prob. 10PSCh. 3 - Duration True or false? Explain. a....Ch. 3 - Duration Calculate the durations and volatilities...Ch. 3 - Term-structure theories The one-year spot interest...Ch. 3 - Real interest rates The two-year interest rate is...Ch. 3 - Duration Here are the prices of three bonds with...Ch. 3 - Prob. 16PSCh. 3 - Prob. 17PSCh. 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. 20PSCh. 3 - Prob. 21PSCh. 3 - Duration Find the spreadsheet for Table 3.4 in...Ch. 3 - Prob. 23PSCh. 3 - Prob. 25PSCh. 3 - Prob. 26PSCh. 3 - Prob. 27PSCh. 3 - Prob. 28PSCh. 3 - Prob. 29PSCh. 3 - Prices and yields If a bonds yield to maturity...Ch. 3 - Prob. 31PSCh. 3 - Price and spot interest rates Find the arbitrage...Ch. 3 - Prob. 33PSCh. 3 - Prices and spot interest rates What spot interest...Ch. 3 - Prices and spot interest rates Look one more time...
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