Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 5, Problem 5MC
- (1) What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond?
- (2) What would happen to the
bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? - (3) What would happen to the value of the 10-year bond over time if the required
rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
The Expectations theory suggests that under certain conditions all bonds outstanding, especially Treasury bonds, must have identical total returns over a 1-year holding period, independently of their final maturity.
suppose that today’s interest rate on a 2-year default free zero-coupon Treasury bond that pays $100 at maturity (0i0,2) is 6%. What is today’s price of such a bond (that is, what would you pay to purchase such a bond)?
D3)
Currently, the market interest rate on a bond is 10%. Yield-to-Maturity is a return you can reliaze when you are investing in a bond until its maturity. If you decide to sell the bond before the maturity, what would be your realized return like? and why?
7) By how much will the price of a 30-year zero-coupon bond change if, due to a permanent
change in interest rates, the price of a 3-year zero-coupon bond decreased by 4%? Assume the
short- and long-term interest rates are the same. If your answer depends on other parameters not
given in this question (e.g., current interest rate, bond prices, etc.) write your answer as a
function of these parameters and specify what these parameters are.
Chapter 5 Solutions
Financial Management: Theory & Practice
Ch. 5 - Short-term interest rates are more volatile than...Ch. 5 - The rate of return on a bond held to its maturity...Ch. 5 - If you buy a callable bond and interest rates...Ch. 5 - A sinking fund can be set up in one of two ways....Ch. 5 - Prob. 1PCh. 5 - Wilson Corporations bonds have 12 years remaining...Ch. 5 - Prob. 3PCh. 5 - The real risk-free rate of interest is 4%....Ch. 5 - A Treasury bond that matures in 10 years has a...Ch. 5 - The real risk-free rate is 3%, and inflation is...
Ch. 5 - Renfro Rentals has issued bonds that have a 10%...Ch. 5 - Thatcher Corporations bonds will mature in 10...Ch. 5 - The Garraty Company has two bond issues...Ch. 5 - Prob. 10PCh. 5 - Goodwynn & Wolf Incorporated (G&W) issued a bond 7...Ch. 5 - Prob. 12PCh. 5 - You just purchased a bond that matures in 5 years....Ch. 5 - A bond that matures in 7 years sells for 1,020....Ch. 5 - Prob. 15PCh. 5 - A bond trader purchased each of the following...Ch. 5 - An investor has two bonds in his portfolio. Each...Ch. 5 - The real risk-free rate is 2%. Inflation is...Ch. 5 - Prob. 19PCh. 5 - Prob. 20PCh. 5 - Suppose Hillard Manufacturing sold an issue of...Ch. 5 - Arnot International’s bonds have a current market...Ch. 5 - Prob. 23PCh. 5 - Prob. 24SPCh. 5 - Prob. 1MCCh. 5 - Prob. 2MCCh. 5 - Prob. 3MCCh. 5 - How is the value of a bond determined? What is the...Ch. 5 - What would be the value of the bond described in...Ch. 5 - Suppose a 10-year, 10% semiannual coupon bond with...Ch. 5 - Write a general expression for the yield on any...Ch. 5 - Define the real risk-free rate (r). What security...Ch. 5 - Prob. 11MCCh. 5 - Prob. 12MCCh. 5 - Prob. 14MCCh. 5 - How are interest rate risk and reinvestment rate...Ch. 5 - What is the term structure of interest rates? What...Ch. 5 - Briefly describe bankruptcy law. If a firm were to...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 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.arrow_forwardb)Assume a 10-year, $1,000 parvalue bond with a 10 percent annual coupon if its required rate of return is 10 percent what is the value of the bond? i) What would be the value of the bond described in part b if, just after it had been issued, the expected inflation rate rose by 3 percentage points? Would we now have a discount or a premium bond? ii) What would happen to the bonds' value if inflation fell, by 3 %? Would we now have a premium or a discount bond?arrow_forwardb) Assume a 10-year, $1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent what is the value of the bond? i) What would be the value of the bond described in part b if, just after it had been issued, the expected inflation rate rose by 3 percentage points? Would we now have a discount or a premium bond? ii) What would happen to the bonds' value if inflation fell, by 3 %? Would we now have a premium or a discount bond?arrow_forward
- (Using algabreic formula to answer) (a) You hold a consol that pays a coupon C in perpetuity. The current interest rate is i, and the average expectation in the market is that this will remain unchanged. What will be the price of the consol today?(b) In the next period however, the interest rate changes unexpectedly to i'. What is the new price of the bond? If the bond is sold at the beginning of that next period, what is the yield from the consol? Does the yield increase or decrease if i' > i? (c) Suppose alternatively that the market expects that the interest rate will changeto i' after the initial period. What is the initial value of the consol, and what is the yield from selling it after one period?arrow_forwardThe price of a bond is 900$, if the coupon rate decreased, the price of this bond will? a. Remain the same. b. Increase. c. Decrease.arrow_forwardWhat do you have to do to the interest rate and years of maturity if a bond pricing problem tells you that interest is compounded quarterly?arrow_forward
- The rate of return you would get if you bought a bond and held it to its maturity date is called the bond's yield to maturity. If interest rates in the economy rise after a bond has been issued, what will happen to the bond's price and to its yield to maturity? Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond's price?arrow_forwardHow do investors calculate the net present value of a bond? If a bond's coupon payment is C, the interest rate is R, and the bond's coupon payment is made in each period for T years at which time the original principal, P, is repaid, then the bond's present discounted value (PDV) is C A. PDV = + (1 + R) (1 + R? (1 + R)T B. PDV = C(1 + R) + C(1 + R)2 - + C(1 + R)T + P(1 + R)T + C P OC. PDV = - + R R2 RT RT C D. PDV = P + C C (1 + R) (1+R)2 (1 + R)T C E. PDV = + + + + (1 + R) (1+ R)2 (1 + R)T (1 + R)T If the interest rate is 9 percent, what is the present value of a perpetuity that pays $50,000 each year, forever? The perpetuity's value is $ (Enter a numeric response rounded to two decimal places.)arrow_forward(b)You purchase the $110 bond today and sell it off next year at $108. What is its one-year rate of return (assume the bond’s coupon rate is 5% and its face value is $100)? If the expected inflation over the course of the year is 2%, what would the ex-ante real rate of return be for the bond on part (b)?arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
Bond Valuation - A Quick Review; Author: Pat Obi;https://www.youtube.com/watch?v=xDWTPmqcWW4;License: Standard Youtube License