Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 7, Problem 30QP
Finding the Maturity [LO2] You’ve just found a 10 percent coupon bond on the market that sells for par value. What is the maturity on this bond?
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Using Bond Quotes [LO2] Suppose the following bond quotes for IOU Corpora-
tion appear in the financial page of today's newspaper. Assume the bond has a face
value of $2,000 and the current date is April 19, 2021. What is the yield to maturity
of the bond? What is the current yield?
Company
(Ticker)
IOU (IOU)
Coupon
5.7
Maturity
Apr 19, 2043
Last Price
108.96
Last
Yield
??
EST Vol
(000s)
1,827
-7
The YTM on a bond is the interest rate you earn on your investment if interest rates don't
change. If you actually sell the bond before it matures, your realized return is known as
the holding period yield (HPY).
a. Suppose that today you buy a bond with an annual coupon of 12 percent for $1,140.
The bond has 19 years to maturity. What rate of return do you expect to earn on your
investment? (Do not round intermediate calculations and enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
b- Two years from now, the YTM on your bond has declined by 1 percent and you
1. decide to sell. What price will your bond sell for? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
b- What is the HPY on your investment? (Do not round intermediate calculations and
2. enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
a. Expected rate of retum.
b-1. Bond price
b-2. HPY
%
10-2 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, or 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?
Chapter 7 Solutions
Fundamentals of Corporate Finance
Ch. 7.1 - What are the cash flows associated with a bond?Ch. 7.1 - What is the general expression for the value of a...Ch. 7.1 - Is it true that the only risk associated with...Ch. 7.2 - Prob. 7.2ACQCh. 7.2 - Prob. 7.2BCQCh. 7.2 - Prob. 7.2CCQCh. 7.3 - What does a bond rating say about the risk of...Ch. 7.3 - What is a junk bond?Ch. 7.4 - Prob. 7.4ACQCh. 7.4 - What do you think would be the effect of a put...
Ch. 7.5 - Why do we say bond markets may have little or no...Ch. 7.5 - Prob. 7.5BCQCh. 7.5 - What is the difference between a bonds clean price...Ch. 7.6 - What is the difference between a nominal and a...Ch. 7.6 - What is the Fisher effect?Ch. 7.7 - What is the term structure of interest rates? What...Ch. 7.7 - What is the Treasury yield curve?Ch. 7.7 - What six components make up a bonds yield?Ch. 7 - Prob. 7.1CTFCh. 7 - The 10-year bonds issued by KP Enterprises were...Ch. 7 - Prob. 7.4CTFCh. 7 - Prob. 7.6CTFCh. 7 - The term structure of interest rates is based on...Ch. 7 - Treasury Bonds [LO1] Is it true that a U.S....Ch. 7 - Interest Rate Risk [LO2] Which has greater...Ch. 7 - Treasury Pricing [LO1] With regard to bid and ask...Ch. 7 - Prob. 4CRCTCh. 7 - Call Provisions [LO1] A company is contemplating a...Ch. 7 - Coupon Rate [LO1] How does a bond issuer decide on...Ch. 7 - Prob. 7CRCTCh. 7 - Prob. 8CRCTCh. 7 - Prob. 9CRCTCh. 7 - Term Structure [LO5] What is the difference...Ch. 7 - Crossover Bonds [LO3] Looking back at the...Ch. 7 - Municipal Bonds [LO1] Why is it that municipal...Ch. 7 - Bond Market [LO1] What are the implications for...Ch. 7 - Prob. 14CRCTCh. 7 - Bonds as Equity [LO1] The 100-year bonds we...Ch. 7 - Prob. 1QPCh. 7 - Interpreting Bond Yields [LO2] Suppose you buy a 7...Ch. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Coupon Rates [LO2] Essary Enterprises has bonds on...Ch. 7 - Bond Prices [LO2] Sqeekers Co. issued 15-year...Ch. 7 - Prob. 7QPCh. 7 - Coupon Rates [LO2] DMA Corporation has bonds on...Ch. 7 - Zero Coupon Bonds [LO2] You find a zero coupon...Ch. 7 - Valuing Bonds [LO2] Yan Yan Corp. has a 2,000 par...Ch. 7 - Valuing Bonds [LO2] Union Local School District...Ch. 7 - Calculating Real Rates of Return [LO4] If Treasury...Ch. 7 - Prob. 13QPCh. 7 - Prob. 14QPCh. 7 - Nominal versus Real Returns [LO4] Say you own an...Ch. 7 - Using Treasury Quotes [LO2] Locate the Treasury...Ch. 7 - Using Treasury Quotes [LO2] Locate the Treasury...Ch. 7 - Bond Price Movements [LO2] Bond X is a premium...Ch. 7 - Interest Rate Risk [LO2] Both Bond Sam and Bond...Ch. 7 - Interest Rate Risk [LO2] Bond J has a coupon rate...Ch. 7 - Prob. 21QPCh. 7 - Prob. 22QPCh. 7 - Accrued Interest [LO2] You purchase a bond with an...Ch. 7 - Prob. 24QPCh. 7 - Finding the Bond Maturity [LO2] Shinoda Corp. has...Ch. 7 - Prob. 26QPCh. 7 - Bond Prices versus Yields [LO2] a. What is the...Ch. 7 - Prob. 28QPCh. 7 - Zero Coupon Bonds [LO2] Suppose your company needs...Ch. 7 - Finding the Maturity [LO2] Youve just found a 10...Ch. 7 - Prob. 31QPCh. 7 - Components of Bond Returns [LO2] Bond P is a...Ch. 7 - Holding Period Yield [LO2] The YTM on a bond is...Ch. 7 - Valuing Bonds [LO2] Jallouk Corporation has two...Ch. 7 - Valuing the Call Feature [LO2] At one point,...Ch. 7 - Prob. 36QPCh. 7 - Real Cash Flows [LO4] When Marilyn Monroe died,...Ch. 7 - Prob. 38QPCh. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Prob. 7MCh. 7 - Prob. 8MCh. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Prob. 10M
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- 5 The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy an annual coupon bond with a coupon rate of 8.2 percent for $845. The bond has 10 years to maturity and a par value of $1,000. What rate of return do you expect to earn on your investment? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b-1. Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b-2. What is the HPY on your investment? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. eBook a. Rate of return b-1. Price b-2. Holding…arrow_forwardQuestion 3. A fixed rate bond with notional 1 pays annual coupons of c at times T1, T2, . . . , Tn where Ti+1 = Ti + 1 and notional 1 at time Tn. a) Write down the bond price BFXD c (t) at time t ≤ T0 in terms of ZCBs. b) Suppose t = T0 = 0. The yield of the bond is defined as the value Y such that B FXD c (0) = Xn i=1 c (1 + Y ) i + 1 (1 + Y ) n , that is, the rate at which IRR discounting gives the bond price. By summing a geometric series, show that BFXD c (0) = 1 if and only if Y = c. c) By writing a swap as the difference between a fixed rate bond and a floating rate bond, show that BFXD c (0) = 1 if and only if c = y0[0, Tn]. Remark 1. This exercise shows that the T-year spot swap rate is the bond coupon such that a T-maturity bond has price par, that is 100% of notional.arrow_forward5 Which of the following describes yield to maturity? Select one alternative O A single discount rate that gives the value of a bond equal to its market price when applied to all cash flows. O The coupon rate that causes a bond price to equal its par (or principal) value. O Interest rate earned on an investment that starts today and last for n-years in the future without coupons. O Interest rates implied by current zero rates for future periods of time.arrow_forward
- Why would à cofmpally LO 2 6.15 Bond Prices versus Yields What is the relationship between the price of a bond and its YTM? b. Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par a. value? What is the relationship between the current yield and YTM for premium bonds? For discount bonds? For bonds selling at par с. value?arrow_forwardQUESTION 4 Answer the problem below: All parts are related. Consider a 5 year to maturity Coupon bond with Face Value = $1000 and a 4% coupon rate; the bond was originally issued in 2020 and will mature in 2025. a. Suppose that interest rates today (in 2022) on these bonds are at 5%. What is the price of this bond today (in 2022)? SET UP THE PROBLEM to illustrate how the 2022 price is obtained (do not calculate it, but set it up substituting in for all values). b. The interest rate in 2024 [in two years] is expected to rise further to 6%. How would you calculate the expected price of bonds in 2024; just SET UP THE PROBLEM, you do not need to use a calculator to obtain the exact value. c. Continue with part b. According to the models discussed in class, what could have caused a rise expected future interest rate? (i.e. what could have caused the expected future price to change)? Discuss.arrow_forwardQUESTION 7 Consider the market for a bond which has a face value of $2,000, pays a coupon of $100, and matures in 1 year (that is, you will get the face value and one coupon payment next year). Suppose the demand for such bonds is given by P=4,000-2Q, and that the supply of such bonds is given by P=1,000+Q. What is the yield to maturity if one were to purchase the bond at the equilibrium price? 5% .05% 10% .10%arrow_forward
- True or false? The liquidity premium theory of the term structure indicates that today's long-term interest rate equals the average of short-term interest rates that people expect to occur over the life of the long-term bond. Question 17 options: True Falsearrow_forwardQ1: A 20-year bond has a coupon rate of 8 percent, and another bond of the same maturity has a coupon rate of 15 percent. If the bonds are alike in all other respects, which will have the greater relative market price decline if interest rates increase sharply? Why?arrow_forward1. Consider a bond market where the demand for a particular bond is given by the equatione Bd = 2360 – 0.8P< where Bd is the number of bonds demanded and P is the price of the bond. Suppose the supply of this bond is fixed at 1400. (a) Calculate the price of the bonde (b) Suppose the bond is a consol with an annual coupon of 45. What is the yield on this security?arrow_forward
- " 3 9 0 1 2 4 15 16 What is the market value of a $1,000 face-value bond with a 10% coupon rate when the market's rate of return is 9%? C All possible @ More than its face value $1,000 C Less than its face valuearrow_forward3. Bond prices and yields (S3.1) Construct some simple examples to illustrate your answers to the following: a. If interest rates rise, do bond prices rise or fall? b. If the bond yield to maturity is greater than the coupon, is the price of the bond greater or less than 100? c. If the price of a bond exceeds 100, is the yield to maturity greater or less than the coupon?arrow_forwardWhich of the following is the correct ranking for the bond price? Bond Coupon rate Maturity YTM A 6% 8 6.5% B 6% 8 7% C 7% 7 6.5% 1.A > B > C 2.B > C > A 3.C > A > B Please answer fast I give you upvote.arrow_forward
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