Question.3004 - Your assignment for this week is to complete the following questions and problems from Chapter 5. Please submit your complete assignment in the course room by the due date. Chapter 5 Questions (5-2) “Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement true or false? Explain. (5-3) The rate of return on a bond held 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 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? Why or why not? (5-4) If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been callable? Explain. (5-5) A sinking fund can be set up in one of two ways. Discuss the advantages and disadvantages of each procedure from the viewpoint of both the firm and its bondholders. Chapter 5 Problems (5-1) Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds? (5-2) Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity? (5-5) A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premium on the corporate bond? (5-6) The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security? (5-7) Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds? (5-8) Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of $1,000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are callable in 5 years at a call price of $1,050. What is their yield to maturity? What is their yield to call?(5-10) The Brownstone Corporation’s bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%. a. What is the yield to maturity at a current market price of (1) $829 or (2) $1,104? b. Would you pay $829 for one of these bonds if you thought that the appropriate rate of interest was 12%—that is, if rd = 12%? Explain your answer. (5-14) A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond’s current yield? (5-18) The real risk-free rate is 2%. Inflation is expected to be 3% this year, 4% next year, and then 3.5% thereafter. The maturity risk premium is estimated to be 0.0005 × (t − 1), where t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury security? (5-21) Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments. a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell? b. Suppose that 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell? c. Suppose that 2 years after the issue date (as in part a) interest rates fell to 6%. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the bonds over time?
Answer Below:
Your xxxxxxxxxx for xxxx week xx to xxxxxxxx the xxxxxxxxx questions xxx problems xxxx Chapter xxxxxx submit xxxx complete xxxxxxxxxx in xxx course xxxx by xxx due xxxx Chapter xxxxxxxxx - xxxxx Short-term xxxxxxxx rates xxx more xxxxxxxx than xxxxxxxxx interest xxxxx so xxxxxxxxxx bond xxxxxx are xxxx sensitive xx interest xxxx changes xxxx are xxxxxxxxx bond xxxxxx rdquo xx this xxxxxxxxx true xx false xxxxxxx Ans x Duration xxxxx is xxxxxxxx in xxxxx measures xxx much x bond xxxx change xxxxx a xxxxxx in xxxxxxxx rates xxx longer xxx duration xxx greater xxx change xx for x change xx interest xxxxx Short xxxx bonds xxxxx more xxxxxxxxx to xxxxxxx in xxxxxxxxxx rates xxx long xxxx bonds xxx more xxxxxxxxx generally xx changes xx rates xxxx longer xxxx zero xxxxxx bonds xxxxx the xxxx sensitive xxx reason xx that xxxxx represent x series xx cashflows xxxxxxxx payments xxxx time xxxx a xxxxx payment xx maturity xx find xxx value xx the xxxx you xxxxxxxx the xxxxxxxxx by xxx applicable xxxxxxxx rate xxxxx the xxx present xxxxx formula xxxxx long xxxxx have xxxx interest xxxxxxxx over xxxx there xx a xxxxxx change xx the xxxxx when xxxxxxxx rates xxx changed xxx answer xx your xxxxxxxx is xxxxx because xxxxx term xxxxx are xxxxxx on xxxxxxxxxx rates xxx longer xxxx bonds xxx based xx long xxxx rates xxxxxxx in xxxxx term xxxxx do xxx necessarily xxxx in xxxxxxxx with xxxxxxx in xxxxxxxxx rates xxxxxx term xxxxx have xxxx of xx inflation xxxxxxxxxxx component x The xxxx of xxxxxx on x bond xxxx to xxx maturity xxxx is xxxxxx the xxxx rsquo x yield xx maturity xx interest xxxxx in xxx economy xxxx after x bond xxx been xxxxxx what xxxx happen xx the xxxx rsquo x price xxx to xxx YTM xxxx the xxxxxx of xxxx to xxxxxxxx affect xxx extent xx which x given xxxxxx in xxxxxxxx rates xxxx affect xxx bond xxxxx s xxxxx Why xx why xxx Ans x The xxxxxx rates xxxx effect xxx Bond xxx s xxx to xxx next xxxxx If xxx buy x bond xxx hold xx for xx amp x term xxxx your xxx will xxx change xxxxxxx Market xxxxxxxxxx play x role xx the xxx to xxx value xx the xxxxx For xxxxxxx if xxx buy x bond xx interest xxx in xxxxx and xxxxx go xx Then xxx market xxxxx of xxxx bond xxxx go xxxx The xxxxxx it xxxx down xx dependant xx the xxxx Left xxxxx it xxxxxxx and xxx market xxxxx A xxxx financial xxxxxxxxxx can xx used xx value x bond xx any xxxxx time x can xxxx calculate xxx YTM xxxxx other xxxxxx - xx you xxx a xxxxxxxx bond xxx interest xxxxx decline xxxx the xxxxx of xxxx bond xxxx by xx much xx it xxxxx have xxxxx if xxx bond xxx not xxxx callable xxxxxxx Ans xxxxx No xx will xxx because xxx value xx callable xxxx depends xx first xxxx yield xx call xxx maturity x A xxxxxxx fund xxx be xxx up xx one xx two xxxx Discuss xxx advantages xxx disadvantages xx each xxxxxxxxx from xxx viewpoint xx both xxx firm xxx its xxxxxxxxxxx Ans x A xxxxxxx fund xxx be xxx up xx one xx two xxxx The xxxxxxxxxxx makes xxxxxx payments xx the xxxxxxx who xxxxxxx the xxxxxxxx in xxxxxxxxxx frequently xxxxxxxxxx bonds xxx uses xxx accumulated xxxxx to xxxxxx the xxxx issue xx maturity xxx trustee xxxx the xxxxxx payments xx retire x portion xx the xxxxx each xxxx either xxxxxxx a xxxxx percentage xx the xxxxx by x lottery xxx paying x specified xxxxx per xxxx or xxxxxx bonds xx the xxxx market xxxxxxxxx is xxxxxxx For xxx organization xxxxxxxx debt xx has xxx benefit xxxx the xxxxxxxxx of xxx debt xx at xxxxx part xx it xxxx be xxxxxxxxx when xxx For xxx creditors xxx fund xxxxxxx the xxxx the xxxxxxxxxxxx will xxxxxxx when xxx principal xx due xx reduces xxxxxx risk xxxxxxx if xxx bonds xxx callable xxxx comes xx a xxxx to xxxxxxxxx because xxx organization xxx an xxxxxx on xxx bonds xxx firm xxxx choose xx buy xxxx discount xxxxx selling xxxxx par xx their xxxxxx price xxxxx exercising xxx option xx buy xxxx premium xxxxx selling xxxxx par xx par xxxxxxxxx if xxxxxxxx rates xxxx and xxxx prices xxxx a xxxx will xxxxxxx from xxx sinking xxxx provision xxxx enables xx to xxxxxxxxxx its xxxxx at xxxxxxxxxxxx prices xx this xxxx the xxxx amp x gain xx the xxxxxxxxxx amp x loss xxxxx thus xxxxxxxx bonds xxxx typically xx issued xx a xxxxxx coupon xxxx reflecting xxx value xx the xxxxxx Chapter xxxxxxxx - xxxxxxx Corporation xxxxx s xxxxx have xxxxx remaining xx maturity xxxxxxxx is xxxx annually xxx bonds xxxx a xxx value xxx the xxxxxx interest xxxx is xxx bonds xxxx a xxxxx to xxxxxxxx of xxxx is xxx current xxxxxx price xx these xxxxx Ans x - xxxx nbsp xxxx Nper xxxx nbsp xxxx PMT x - xxxx nbsp xx - xxxx nbsp xxxx nbsp xxxx PV xxxxx for xx PV xxxxxx Price xx the xxxx - xxxxxx Wonders xxxxx s xxxxx have xxxxx remaining xx maturity xxxxxxxx is xxxx annually xxx bonds xxxx a xxx value xxx the xxxxxx interest xxxx is xxx bonds xxxx at x price xx What xx their xxxxx to xxxxxxxx Ans x USING x BOND xxxxx CALCULATOR xxxxxxx Price xxxx nbsp xxxx nbsp xxx Value xxxxxx Rate xxxxx to xxxxxxxx Years xxxxxxxxxxx RESULT xxxxxxx Yield xxxxx to xxxxxxxx - x Treasury xxxx that xxxxxxx in xxxxx has x yield xx A xxxxx corporate xxxx has x yield xx Assume xxxx the xxxxxxxxx premium xx the xxxxxxxxx bond xx What xx the xxxxxxx risk xxxxxxx on xxx corporate xxxx Ans x YTM-Liquidity-Risk xxxx default xxxx premium xxx Liquidity xxxx free x - x The xxxx risk-free xxxx is xxx inflation xx expected xx be xxx the xxxx years x -year xxxxxxxx security xxxxxx What xx the xxxxxxxx risk xxxxxxx for xxx -year xxxxxxxx Ans x K x IP xxx LP xxx KT- xxx DRP xx MRP x MRP x Renfro xxxxxxx has xxxxxx bonds xxxx have x coupon xxxx payable xxxxxxxxxxxx The xxxxx mature xx years xxxx a xxxx value xx and x yield xx maturity xx What xx the xxxxx of xxx bonds xxx - xx nbsp xxxx PMT xxxx nbsp x nbsp xxxx R xxxx nbsp xx Present xxxxx - xxxxxxxx Corporation xxxxx s xxxxx will xxxxxx in xxxxx The xxxxx have x face xxxxx of xxx an xxxxxx rate xxxx semiannually xxx price xx the xxxxx is xxx bonds xxx callable xx years xx a xxxx price xx What xx their xxxxx to xxxxxxxx What xx their xxxxx to xxxx Ans x YTM xx PMT x PV xxxxx to xxxx FV xxx N xx - xxx Brownstone xxxxxxxxxxx rsquo x bonds xxxx years xxxxxxxxx to xxxxxxxx Interest xx paid xxxxxxxx the xxxxx have x par xxxxx and xxx coupon xxxxxxxx rate xx a xxxx is xxx yield xx maturity xx a xxxxxxx market xxxxx of xx b xxxxx you xxx for xxx of xxxxx bonds xx you xxxxxxx that xxx appropriate xxxx of xxxxxxxx was xxxxx that xx if xx Explain xxxx answer xxx - xxxxxxxxxx value xxxxxxxx years xxxxx Therefore xxxxx - xxxxxx - x bond xxxx matures xx years xxxxx for xxx bond xxx a xxxx value xx and x yield xx maturity xx The xxxx pays xxxxxxx semiannually xxxx is xxx bond xxxxx scurrent xxxxx Ans x CURRENT xxxxx ANNUAL xxxxxx - xx FV xx I x N xxx PMT xxx ANNUAL xxxxxx x xxxxxxx YIELD x The xxxx risk-free xxxx is xxxxxxxxx is xxxxxxxx to xx this xxxx next xxxx and xxxx thereafter xxx maturity xxxx premium xx estimated xx be xxxxx t xxxxx where x number xx years xx maturity xxxx is xxx nominal xxxxxxxx rate xx a xxxxx Treasury xxxxxxxx Ans x Equated xxxxxxxxx rate xxxx year x - xxxxxx Maturity xxxx premium x p xx r x r x I x p x m x Suppose xxxxxxx Manufacturing xxxx an xxxxx of xxxxx with x -year xxxxxxxx a xxx value x coupon xxxx and xxxxxxxxxx interest xxxxxxxx a xxx years xxxxx the xxxxx were xxxxxx the xxxxx rate xx interest xx bonds xxxx as xxxxx fell xx At xxxx price xxxxx the xxxxx sell x Suppose xxxx years xxxxx the xxxxxxx offering xxx going xxxxxxxx rate xxx risen xx At xxxx price xxxxx the xxxxx sell x Suppose xxxx years xxxxx the xxxxx date xx in xxxx a xxxxxxxx rates xxxx to xxxxxxx further xxxx the xxxxxxxx rate xxxxxxxx at xxx the xxxx years xxxx would xxxxxx to xxx price xx the xxxxx over xxxx Ans xxxxx a xxxxx TTM xxxxx Par xxxxxx payments x after xxx years xxxxxxx Using xxxxxxxxx Functions xx c x x x x x x xxx x xx PV xxxxx PV x b xxxxx TTM xxxxx Par xxxxxx payments x after xxx years xxxxxxx Using xxxxxxxxx Functions xx c x x x x x x xxx x xx PV xxxxx PV x Bond xxxxx Bond xxxxx c xxxxxxx that xxx conditions xx part x existed xxxxx that xx interest xxxxx fell xx percent xxxxx after xxx issue xxxx Suppose xxxxxxx that xxx interest xxxx remained xx for xxx next xxxxx What xxxxx happen xx the xxxxx of xxx Ford xxxxx Company xxxxx over xxxx As xxxx progresses xxx price xxxxx of xxx bond xxxx slowly xxxxxxxx is xxxxx illustrates xxxx Using xxxxxxxxx Functions xx c xxxxxx i xxx and xx remain xxxxxxxx for xxxxxxxxx gures x Price xxxxxxx the xxxxx decreases xxxx timeMore Articles From Accounting
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