In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.33%. a. What is the highest expected return these bonds could have? b. At the time, similar maturity Treasuries had a yield of 1.33%. Could these bonds actually have an expected return equal to your answer in part (a)? c. If you believe Ralston Purina's bonds have 0.5% chance of default per year, and that expected loss rate in the event of default is 45%, what is your estimate of the expected return for these bonds?

In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.33%. a. What is the highest expected return these bonds could have? b. At the time, similar maturity Treasuries had a yield of 1.33%. Could these bonds actually have an expected return equal to your answer in part (a)? c. If you believe Ralston Purina's bonds have 0.5% chance of default per year, and that expected loss rate in the event of default is 45%, what is your estimate of the expected return for these bonds?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 1.53%. a. What is the highest expected return these bonds could have? b. At the time, similar maturity Treasuries had a yield of 0.53%. Could these bonds actually have an expected return equal to your answer in part (a)? c. If you believe Ralston Purina's bonds have 0.8% chance of default per year, and that expected loss rate in the event of default is 54%, what is your estimate of the expected return for these bonds? a. What is the highest expected return these bonds could have? The highest expected return these bonds could have is%. (Round to two decimal places.)
In mid-2009, Rite Aid had CCC-rated,19-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 6 % and you believe Rite Aid's bonds have a beta of 0.39. The expected loss rate of these bonds in the event of default is 55%. a. What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009? The required return for this investment is_______%.(Round to two decimal places.) The annual probability of default is _____%. (Round to two decimal places.) b. In mid-2015, Rite-Aid's bonds had a yield of 6.7%, while similar maturity Treasuries had a yield of 1.7%. What probability of default would you estimate now? The probability of default will be_____%. (Round to two decimal places.)
Lantech investor is deciding between two bonds: Bond A pay $72 annual interest and has a market value of $925. It has 10 years to maturity. Bond B pays $62 annual interest and has a market value of $910. It has two years to maturity. Par value of the bonds is $1,000. A. What is the current yield on both bonds? B. Which bond should be chosen and why? C. A drawback of current yield is that is doesn't consider the total life of the bond. E.g. Yield to maturity on Bond A is 8.33 percent. What is the yield to maturity on Bond B? D. Is your answer changed from parts B and C based on which bond should be chosen?
In mid-2009, Rite Aid has CCC-rated, 11-year bonds outstanding with a yield to maturity of 17.3%.At the same time, similar maturity Treasuries had a yield of 2%. Suppose the market risk premiumis 4% and you believe Rite Aid’s bonds have a beta of 0.39. The expected loss rate of these bonds inthe event of default is 52%. What annual probability of default would be consistent with the yield tomaturity of these bonds in mid-2009?
Findlay company recently issued bonds with a 20-year maturity, a 7.5% semiannual coupon, and a par value of $1,000. The going interest rate (kd, rd) is 6.0%, based on semiannual compounding. What is the bond's price? Bond valuation related problems should be solved by using a financial calculator or MS excel spreadsheet. Accordingly, you must show the values of all relevant time valu of money variables
On July 1, 2013 an investment manager purchased five-hundred $1,000 par value bonds with an 8.75% coupon rate for $467,000. The bonds mature on July 15, 2021. a. According to this information, would you expect that the rates being offered by similar investments on the open market carry a rate that is higher, or lower, than the coupon rate? Explain. b. Find the current yield AND the yield to maturity. Show your work.
Drongo Corporation's 4-year bonds currently yield 7.7 percent and have an inflation premium of 3.7%. The real risk-free rate of interest, r*, is 2.6 percent and is assumed to be constant. The maturity risk premium (MRP) is estimated to be 0.1% (t-1), where t is equal to the time to maturity. The default risk and liquidity premiums for this company's bonds total 1.1 percent and are believed to be the same for all bonds issued by this company. If the average inflation rate is expected to be 4 percent for years 5 and 6, what is the yield on a 6-year bond for Drongo Corporation? 8.00% O 8.50% 9.00% 9.50% 10.00%
Katie Pairy Fruits Inc. has a $1,300 14-year bond outstanding with a nominal yield of 18 percent (coupon equals 18% × $1,300 = $234 per year). Assume that the current market required interest rate on similar bonds is now only 12 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the current price of the bond. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) b. Find the present value of 6 percent × $1,300 (or $78) for 14 years at 12 percent. The $78 is assumed to be an annual payment. Add this value to $1,300. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) multiple choice Yes No
Suppose that on March 3, 2017, ACME Inc. issued 10-year coupon bonds with a face value of $100,000 and coupon payments of 5,000. (the coupons are paid each year on March 3, starting with the year 2018). Suppose that on March 3, 2017, ACME bonds sold for $90,000. 2. What can you say about the value of the the yield to maturity paid by ACME bonds, without calculating it?
Drongo Corporation's 3-year bonds currently yield 6.3 percent and have an inflation premium of 3.3%. The real risk-free rate of interest, r*, is 1.5 percent and is assumed to be constant. The maturity risk premium (MRP) is estimated to be 0.1% (t - 1), where t is equal to the time to maturity. The default risk and liquidity premiums for this company's bonds total 1.3 percent and are believed to be the same for all bonds issued by this company. If the average inflation rate is expected to be 3 percent for years 4, 5, and 6, what is the yield on a 6-year bond for Drongo Corporation? ○ 6.05% 6.45% 6.25% 5.85% 5.65%
I need a step by step solution on how to solve these types of problems: Lee Corp.'s 5-year bonds yield 7.50% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds isIP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.40% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t –1)×0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay's bonds?
You are analyzing the cost of debt for a firm. You know that the firm’s 14-year maturity, 6.60 percent coupon bonds are selling at a price of $825.00. The bonds pay interest semiannually. If these bonds are the only debt outstanding, answer the following questions: What is the current YTM of the bonds?

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