Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
7th Edition
ISBN: 9780357033609
Author: Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher: Cengage Learning
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Chapter 12, Problem 10FPE
a)
Summary Introduction
To determine: The clean price of the bond
b)
Summary Introduction
To determine: The dirty price of a bond
c)
Summary Introduction
To discuss: The way the clean and dirty price of a bond are relevant to the buyer.
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PICK ONE: Explain why
YOU: Suppose that 6 months after you purchase the bond, the market rate for interest on this type of bond falls to 7.00%. This will cause the (coupon / market price / par value) to (fall / rise). From the issuer’s perspective, the lower interest rate means that he or she would be (worse / better) off issuing new bonds at this lower rate than continuing to pay you 9%.
1)Your broker offers to sell for $1,157 a AAA-rated bond with a coupon rate of 7 percent and a maturity of six years. Given that the interest rate on comparable debt is 4 percent, calculate the bond's price. Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar.
2)Is your broker fairly pricing the bond?
3)the bond should or should not be purchased?
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?
Chapter 12 Solutions
Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
Ch. 12 - Describe the various types of risks to which...Ch. 12 - Prob. 2LOCh. 12 - Prob. 3LOCh. 12 - Prob. 4LOCh. 12 - Prob. 5LOCh. 12 - Prob. 6LOCh. 12 - What makes for a good investment? Use the...Ch. 12 - An investor is thinking about buying some shares...Ch. 12 - The price of Outdoor Designs, Inc. is now 85. The...Ch. 12 - The Castle Company recently reported net profits...
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- Please kindly assist d & e. Thank you. Two bonds A and B have the same credit rating, the same par value and the same coupon rate. Bond A has 30 years to maturity and bond B has five (5) years to maturity. Please demonstrate your understanding of interest rates risk by answering the following questions :a. Discuss which bond will trade at a higher price in the marketb. Discuss what happens to the market price of each bond if the interest rates in the economy go up.c. Which bond would have a higher percentage price change if interest rates go up?d. Please substantiate your argument with numerical examples.e. As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy? Provide your explanations and definitions in detail and be precise.arrow_forwardYour broker offers to sell for $1,071 a AAA-rated bond with a coupon rate of 6 percent and a maturity of nine years. Given that the interest rate on comparable debt is 5 percent, calculate the bond's price. Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar. $ Is your broker fairly pricing the bond? , so the bond be purchased.arrow_forwardThe 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_forward
- Use the following zero-coupon bond prices to answer the next questions: Days to Maturity Zero-Coupon Bond Price 90 180 270 360 0.99009 0.97943 0.96525 0.95238 Suppose you are the counterparty for a lender who enters into an FRA to hedge the lending rate on $10m for a 90-day loan commencing on day 270. What positions in zero-coupon bonds would you use to hedge the risk on the FRA?arrow_forwardSuppose you have the following liabilities: Liability 1: A one-time liability maturing in 4 years with the present value of $100. Liability 2: A one-time liability maturing in 8 years with the present value of $100. To immunize your liabilities using the following two bonds, what would be the weights of the two bonds in your immunizing bond portfolio? Bond A: A zero-coupon bond with a face value of $100 and a time to maturity of 3 years. Bond B: A zero-coupon bond with a face value of $100 and a time to maturity of 12 years. A. 33% in Bond A and 67% in bond B B. 70% in Bond A and 30% in bond B C. 30% in Bond A and 70% in bond B D. 67% in Bond A and 33% in bond B E. 50% in Bond A and 50% in bond Barrow_forwardYour broker offers to sell for $1,060 a AAA-rated bond with a coupon rate of 5 percent and a maturity of seven years. Given that the interest rate on comparable debt is 4 percent, calculate the bond's price. Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar. Is your broker fairly pricing the bond? -Select- V so the bond-Select- v be purchased.arrow_forward
- You consider purchasing bonds today. There are three future time periods, t = 1, 2, 3, wherebonds can have payoffs. Consider the following 4 bonds: a) One amortizing bond paying $40 each period trading at a price of $104.95.b) One amortizing bond paying less in early periods and more in later periods. The bond pays $40 inperiod 1, $30 in period 2, and $20 in period 3. This bond is trading at a price of $80.61.c) One coupon bond with a 11% coupon rate trading at a price of $96.08.d) One zero coupon, which currently trades at a price of $77.22. Suppose you can take long or short positions in any bond, and also lend or borrow money. Is it possibleto construct an arbitrage trade where you pay nothing upfront, and get a certain payoff in period 1? If so,describe how you would do this trade.arrow_forwardConsider a $1,000-par-value Bond with the following characteristics: a current market price of $761, 12 years until maturity, and an 8% coupon rate. We want to determine the discount rate that sets the present value of the bond’s expected future cash-flow stream to the bond’s current market price. You are required to determine the discount rate that equates the present value of the bond?arrow_forwardA bond is currently selling for $880. This indicates that this bond is _____, and you would expect that the coupon rate would be _____ than the current market rate. Attractive; greater than Attractive; less than Unattractive; greater than Unattractive; less thanarrow_forward
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