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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Textbook Question
Chapter 3, Problem 8PS
Spot interest rates and yields Assume annual coupons.
- a. What is the formula for the value of a two-year, 5% bond in terms of spot rates?
- b. What is the formula for its value in terms of yield to maturity?
- c. If the two-year spot rate is higher than the one-year rate, is the yield to maturity greater or less than the two-year spot rate?
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d. If you hold the bonds for one year, and interest rates do not change, what total rate of return will you earn, assuming that you pay the market price? Why is this different from the current yield and YTM?
The rate of return that you would earn if you bought a bond and held It to its maturity date is called the bond's yield to maturity (YTM). If Interest rates in the economy rise after a bond has been issued, what will happen to the bond's price and to Its YTM? Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond's price? Briefly explain with necessary numerical data.
Suppose you are given the following information about the default-free, coupon-paying yield curve:
Maturity (years)
Coupon rate (annual payment)
YTM
a. Use arbitrage to determine the yield to maturity of a two-year zero-coupon bond.
b. What is the zero-coupon yield curve for years 1 through 4?
Note: Assume annual compounding.
a. Use arbitrage to determine the yield to maturity of a two-year zero-coupon bond.
The yield to maturity of a two-year, zero-coupon bond is %. (Round to two decimal places.)
b. What is the zero-coupon yield curve for years 1 through 4?
The yield to maturity for the three-year and four-year zero-coupon bond is found in the same manner as the two-year zero-coupon bond.
The yield to maturity on the three-year, zero-coupon bond is
%. (Round to two decimal places.)
%. (Round to two decimal places.)
The yield to maturity on the four-year, zero-coupon bond is
Which graph best depicts the yield curve of the zero-coupon bonds? (Select the best choice below.)
O A.
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7-
6-…
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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