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 9QP
Zero Coupon Bonds [LO2] You find a zero coupon bond with a par value of $10,000 and 17 years to maturity. If the yield to maturity on this bond is 4.9 percent, what is the price of the bond? Assume semiannual compounding periods.
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You are given the following information: The yield of a one year zero coupon bond is 2.0% while the yields on a 2 and 3 year fixed coupon bonds are 2.5% and 3.5% respectively.
What is the 2-year Zero Rate?
What is the expected one-year interest rate two years from today?
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…
33: 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 holdings period yield (HPY)
Suppose that today you buy a bond with an annual coupon rate of 7% for 1050. The bond has 17 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1000.
2 years from now, the YTM on your bond has declined by 1 %, and you decide to sell. What price will your bond sell for? What is the HPY on your investment? Compared this yield to the YTM when you first bough the bond. Why are they different?
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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- -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 %arrow_forwardConsider a two-period coupon bond with face value M = 100, recovery rate a = 0.5, per period coupon rate c = 10%, and survival rate λ = 0.9. If the risk-free rate per period is 5%, what is the bond price now? P = 9+5.5 1+5% + = 99.116 ■ 89.1+4.95 (1+5%)²arrow_forward[EXCEL] Zero coupon bonds: Diane Carter is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market interest rate for similar investments is 9 percent. Assume annual coupon payments. What is the current value of this bond? Please use Excelarrow_forward
- Q1. Consider the following par bond (ie coupon rate=yield):Year: 10 and 20 years . Yld 1.50% and 2.0% Q1c. if you hold the 20Y for 1 year, what is your total return from the investment assuming yldcurve does not change ? Hint: your total return comes from coupon collection as well as price appreciation ordepreciationarrow_forward= = Problem 2 Currently the yield curve observed in the market is as follows: yı 6%, Y2 = 7%, and yз 9%. You are choosing between a two-year and three-year maturity bonds all paying annual coupons of 8%, once a year. You strongly believe that at the end of year 1 the yield curve will become flat at 9%. (1) Which bond (and why) should you buy if you plan to close out your position in one year right after receiving the coupon payment? (2) Suppose that you can either invest in a two-year bond described above, or invest in a 1-year bank deposit with an annual interest rate of 6%. As in (a), your investment horizon is 1 year. Which option would you choose and why?arrow_forward7 What is the price of a 10-year zero coupon bond with face value of $1,000 and when the market required yield is 6%? What happens to the bond price if the bond matures in 20 years, instead of 10? Face Value Market required yield Maturity (years) Frequency of payments Price Face Value Market required yield Maturity (years) Frequency of payments Pricearrow_forward
- A one-year zero coupon bond costs $99.43 today. Exactly one year from today, it will pay $100. What is the annual yield-to-maturity of the bond? (1.e., what is the discount rate one needs to use to get the price of the bond given the future cash flow of $100 in one year?) 1.0057 0.0057 2.0057 -0.0057arrow_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_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
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What happens to my bond when interest rates rise?; Author: The Financial Pipeline;https://www.youtube.com/watch?v=6uaXlI4CLOs;License: Standard Youtube License