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 - xxxxxxxxxx interest xxxxx are xxxx volatile xxxx long-term xxxxxxxx rates xx short-term xxxx prices xxx more xxxxxxxxx to xxxxxxxx rate xxxxxxx than xxx long-term xxxx prices 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 s xxxxx to xxxxxxxx If xxxxxxxx rates xx the xxxxxxx rise xxxxx a xxxx has xxxx issued xxxx will xxxxxx to xxx bond 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 x price xxx or xxx not xxx - xxx market xxxxx only xxxxxx the xxxx s xxx to xxx next xxxxx If xxx buy x bond xxx hold xx for xx s xxxx then xxxx YTM xxxx not xxxxxx However xxxxxx conditions xxxx a xxxx in xxx day xx day xxxxx of xxx Bonds xxx example xx you xxx a xxxx at xxxxxxxx due xx years xxx rates xx up xxxx the xxxxxx value xx your xxxx will xx down xxx amount xx goes xxxx is xxxxxxxxx on xxx Time xxxx until xx matures xxx the xxxxxx rates x good xxxxxxxxx calculator xxx be xxxx to xxxxx a xxxx at xxx given xxxx I xxx also xxxxxxxxx the xxx among xxxxx things x If xxx buy x callable xxxx and xxxxxxxx rates xxxxxxx will xxx value xx your xxxx rise xx as xxxx as xx would xxxx risen xx the xxxx had xxx been xxxxxxxx Explain xxx 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 s xxxx is xxx bondholder x loss xxxx callable xxxxx will xxxxxxxxx be xxxxxx at x higher xxxxxx rate xxxxxxxxxx the xxxxx of xxx option xxxxxxx Problems x Jackson xxxxxxxxxxx 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 Nper xxx x x FV x PV xxxxx for xx PV xxxxxx Price xx the xxxx - xxxxxx Wonders x bonds xxxx years xxxxxxxxx to xxxxxxxx Interest xx paid xxxxxxxx the xxxxx have x par xxxxx and xxx coupon xxxxxxxx rate xx The xxxxx sell xx a xxxxx of xxxx is xxxxx yield xx maturity xxx - xxxxx A xxxx YIELD xxxxxxxxxx Current xxxxx Par xxxxx Coupon xxxx Years xx Maturity xxxxx CALCULATION xxxxxx Current xxxxx Yield xx Maturity x A xxxxxxxx bond xxxx matures xx years xxx a xxxxx of x -year xxxxxxxxx bond xxx a xxxxx of xxxxxx that xxx liquidity xxxxxxx on xxx corporate xxxx is xxxx is xxx default xxxx premium xx the xxxxxxxxx bond xxx - xxxxxxxxxxxxxxxxxx free xxxxxxx risk xxxxxxx YTM xxxxxxxxx Risk xxxx - x - xxx real xxxxxxxxx rate xx and xxxxxxxxx is xxxxxxxx to xx for xxx next xxxxx A xxxxx Treasury xxxxxxxx yields xxxx is xxx maturity xxxx premium xxx the xxxxx security xxx - x K xx DRP xx MRP xxx MRP xxx LP xxx - xxx - xxxxxx Rentals xxx issued xxxxx that xxxx a xxxxxx rate xxxxxxx semiannually xxx bonds xxxxxx in xxxxx have x face xxxxx of xxx a xxxxx to xxxxxxxx of xxxx is xxx price xx the xxxxx Ans x FV xxx N x PV xxxxxxx Value x Thatcher xxxxxxxxxxx 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 s xxxxx have xxxxx remaining xx maturity xxxxxxxx is xxxx annually xxx bonds xxxx a xxx value xxx the xxxxxx interest xxxx is x What xx the xxxxx to xxxxxxxx at x current xxxxxx price xx or x Would xxx pay xxx one xx these xxxxx if xxx thought xxxx the xxxxxxxxxxx rate xx interest xxx 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 xxxxxxxx yield xxx - xxxxxxx YIELD xxxxxx COUPON x PV xx PV x Y x CPT xxx PMT xxxxxx COUPON x CURRENT xxxxx - xxx real xxxxxxxxx rate xx Inflation xx expected xx be xxxx year xxxx year xxx then xxxxxxxxxx The xxxxxxxx risk xxxxxxx is xxxxxxxxx to xx t xxxxx t xxxxxx of xxxxx to xxxxxxxx What xx the xxxxxxx interest xxxx on x -year xxxxxxxx security xxx - xxxxxxx inflation xxxx over xxxx I x approx xxxxxxxx risk xxxxxxx r x t- x m x f x r x r x - xxxxxxx Hillard xxxxxxxxxxxxx sold xx issue xx bonds xxxx a xxxxx maturity x par xxxxx a xxxxxx rate xxx semiannual xxxxxxxx payments x Two xxxxx after xxx bonds xxxx issued xxx going xxxx of xxxxxxxx on xxxxx such xx these xxxx to xx what xxxxx would xxx bonds xxxx b xxxxxxx that xxxxx after xxx initial xxxxxxxx the xxxxx interest xxxx had xxxxx to xx what xxxxx would xxx bonds xxxx c xxxxxxx that xxxxx after xxx issue xxxx as xx part x interest xxxxx fell xx Suppose xxxxxxx that xxx interest xxxx remained xx for xxx next xxxxx What xxxxx happen xx the xxxxx of xxx bonds xxxx time xxx 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 xxxx is xxxxxxxx rates xxxx to xxxxxxx years xxxxx the xxxxx date xxxxxxx further xxxx the xxxxxxxx rate xxxxxxxx at xxx the xxxx years xxxx would xxxxxx to xxx price xx the xxxx Motor xxxxxxx bonds xxxx time xx time xxxxxxxxxx the xxxxx value xx the xxxx will xxxxxx decrease xx table xxxxxxxxxxx that xxxxx Financial xxxxxxxxx in x Assume x PMT xxx FV xxxxxx constant xxx following xxxxx n xxxxx erefore xxx price xxxxxxxxx over xxxxMore Articles From Accounting
.ico)
.ico)
.ico)
.ico)
