What happens to the coupon rate of a $1,000 face value bond that pays $70 annually in interest if market interest rates change from 9% to 10%? O The coupon rate increases to 10%. O The coupon rate remains at 9%. O The coupon rate remains at 7%. O The coupon rate decreases to 8%.

What happens to the coupon rate of a $1,000 face value bond that pays $70 annually in interest if market interest rates change from 9% to 10%? O The coupon rate increases to 10%. O The coupon rate remains at 9%. O The coupon rate remains at 7%. O The coupon rate decreases to 8%.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 5MC: What would be the value of the bond described in Part d if, just after it had been issued, the...

See similar textbooks

Related questions

Q: The Capital Asset Pricing Model (CAPM) describes a relationship between the expected return of,,,…

A: Solution:- Capital Asset Pricing Model (CAPM) is an equity model which calculates the required rate…

Q: What is a leveraged buyout? It is a type of joint venture. It is an…

A: concept. A buyout is the acquisition of a controlling interest in a company Buyouts occur when a…

Q: Using the Treasury yield information in part c, calculate the following rates using geometric…

A: Data given: Maturity (year) Yield 1 5.37% 2 5.42% 3 5.58% 4 5.64% 5 5.56% 10 5.68%…

Q: Macy of New York sold LeeCo. of Chicago office equipment with a $7,200 list price. Sale terms were…

A: The company makes sales on cash and credit as well. The company makes sales on account to attract…

Q: E eBook B Problem Walk-Through A stock is expected to pay a dividend of $1.75 at the end of the year…

A: To calculate the stock price 5 years from now we will use the below formula Stock price in 5 years…

Q: sell

A: We know that the call buyer has the right to buy the stock at the given strike price, even if the…

Q: Beltime Associates is a research firm that conducts market surveys and publishes reports on various…

A: The required return here is a function of three factors: Market, size and value. Several statements…

Q: Guelph Inc. would like you to assess the after-tax viability of a new machine using annual worth…

A: The annual worth analysis method is used to assess the viability of any asset by converting cash…

Q: A mortgage banking company has been evaluating the merits of a 50-year mortgage (in addition to…

A: Concept. FV = A (1+r)n Where , FV = future value A = amount of loan r = interest rate n = time…

Q: IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥210 million…

A: Exchange rate are volatile in nature and change quickly in the market depending upon the supply and…

Q: I was already given the correct answer for Parts A-C. The equation I was given was = -(1.4+6)+…

A: Given: Vacant lot = $1.4 million Hotel cost = $6 million With tax Cash flows =$500,000 With out tax…

Q: Morphosis (Ltd) is a manufacturing company focusing on food production. The company recently paid a…

A: The risk-free rate is 6.5% Return on the market is 25% S.D. of the market is 10% S.D. of Morphosis…

Q: What is the payback period for the project described below? Machine investment $24,999 MARR 10%…

A: We need to find the discounted payback period here. As a first step we need to find the PV of the…

Q: By successive computations, using the present value of $1 table in Exhibit 5. Round to the nearest…

A: Formula used: PV @r%=1(1+r%)n

Q: A company is trying to decide whether to undertake a marketing campaign before launching a new…

Q: 10.You are planning to purchase the stock of Ted's Sheds Inc. and you expect it to pay a dividend of…

A: Dividend The portion of the profit that the company distributes between its shareholders is known as…

Q: Elana and Wiyot borrowed $41,000 at 8.54% compounded monthly as a second mortgage loan against their…

A: Mortgage loans are very common for purchasing the homes and it make the home purchase very easy…

Q: Use the following information on Stocks X and Y to answer questions 1 through 3 (round to the…

A: Standard deviation= Sqrt (summation of all 3 markets ( return - expected return)^2* probability)

Q: ur investment is growing at 20%, how would you calculate how long it would take to double in size?…

A: The future value of money is amount being deposited and amount of interest being accumulated over…

Q: Adamson Corporation is considering four average-risk projects with the following costs and rates of…

A: The project that has an expected return greater than the WACC is expected to result in profits. The…

Q: An investment project costs $13967. It is expected to have an annual net cash flow of $6119 for 5…

A: Payback period is calculated using following equation Payback period = Initial cash outflowAnnual…

Q: Empire Electric Company (EEC) uses only debt and common equity. It an interest rate of ra = 11% as…

A: Formula for calculating value of the share with Constant growth using Dividend Based Model: P0 =…

Q: Using the cost of new common stock, the firm's WACC is?

A: Given: Weight of long-term debt 50% Weight of preferred stock 15% Weight of common stock equity…

Q: You are purchasing a home for $340 The down payment is 25% and the bala will be financed with a…

A: Mortgage loans are very important for buying homes but there are many types of other payments to be…

Q: Sadaplast has a target capital structure of 65% common equity, 30% debt, and 5% preferred stock.…

A: A firm has different sources of capital available at different costs. We need to find the break…

Q: A change in the risk premium, E(Rm) - Rf, results in... Group of answer choices 1. A change in…

A: concept. security market line (SML) gives the market’s expected return at different levels of…

Q: Question 4. A recent article in the Wall Street Journal (wage law) described a California law that…

A: The demand for substitute goods are likely to increase because of increase in the prices of other…

Q: Suppose your company imports computer motherboards from Singapore. The exchange rate is currently…

A: Given: Particulars Amount Mother boards 30,000 Exchange rate 1.3356 S$/US$…

Q: The following table gives Foust Company's earnings per share for the last 10 years. The common…

A: Given: Year EPS Year EPS 2012 $3.90 2017 $5.73 2013 $4.21 2018 $6.19 2014 $4.55…

Q: RatePicker Co.'s bonds, issued 2 years ago, currently sell for $1,076. They have an annual coupa…

A: Yield to maturity of bond is rate of return realized on the bond when that is held till maturity and…

Q: If the bank decides to cut down on interest expenses by reducing its dependence upon borrowed funds,…

A: We have to figure out the policy the bank must follow if it decides to cut down on interest expenses…

Q: The units of Manganese Plus available for sale during the year were as follows: Mar. 1 20 units @…

A: The periodic inventory system is where the accounting and inventory records are not updated after…

Q: Which of the following is(are) true about derivatives? I An agreement that derives its value from…

A: Financial instruments are either tradable assets or can alternatively be thought of as bundles of…

Q: Oxford Buses has a fleet of 200 buses and the divisional manager for the city is deciding whether to…

A: Initial investment per bus = 1,200,000 Annual net profit per bus = 400,000 Payback period is the…

Q: 771 APR = (1+) -1

A: Loans are paid by the monthly payment and they are charged on the basis of monthly interest rate but…

Q: You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend…

A: The stock price in 3 years can be found using the dividend discount model. This model states that…

Q: When Angela retires in 14 years, he wants to receive $750.00 payments at the start of every month…

Q: What’s the interest rate of a 5-year, annual $5,200 annuity with present value of $21,000? (Use a…

A: Annual payment = $5,200 Present value = $21,000 Period = 5 years Interest rate = ?

Q: It is known that the market rates for financing and reinvestment of resources for the investment…

A: Conventional and non-conventional pattern of cash flows A conventional pattern of cash flows is one…

Q: calculate the firms: d) P/E ratio given the market price above e) ROE, f) Debt-equity ratio…

A: Solution:- Price Earnings ratio (P/E ratio) is the ratio of current market price per share to the…

Q: Juliana Cardenas, owner of the Baker Company, was approached by a total local dealer of…

A: In a typical capital budgeting decision, we need to know the annual cost savings that will make the…

Q: Alpha Ltd and Omega Ltd are identical in all aspects except their capital structures. Alpha Ltd is…

A: We have to apply the MM Propositions to derive the missing valuation parameters like WACC and stock…

Q: Taneal is considering investing in one of two portfolios, Portf and bonds and Portfolio B which…

A: Standard is the indicator of the risk of security and more standard deviation indicates more risk…

Q: Bear Market Normal Market Bull Market Probability 0.2 0.5 0.3 Stock X’s return -25% 10%…

Q: The Caccamisse Corporation has annual credit sales of $29 million. The average collection period is…

A: Average collection period = Accounts Receivable * 365 days / Net Credit Sales

Q: CAM-Constant Amortizing Mortgage CPM-Constant Payment Mortgage Upload your work as a single Excel…

A: In a constant Amortizing Mortgage(CAM), an equal amount of principal is paid at the end of each…

Q: A utility company is considering the following plans to provide a certain service required by…

A: Net present worth states that the money present today is more worthful than the money will receive…

Q: How much can be with John from this fun at the beginning of each half year for the next three years…

A: Payment per period can be calculated using PMT function in excel. PMT(rate, nper, pv, [fv],…

Q: If you buy a call option contract on Apple Inc, with the most heavily traded strike price today what…

A: Solution:- Derivative is a financial contract which derives its value from an underlying asset,…

Q: Bob makes his first $1,700 deposit into an IRA earning 7.4% compounded annually on his 24th birthday…

A: There is need of proper planning for retirement benefits and if done on time than money grow to…

Concept explainers

Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.

Question

What happens to the coupon rate of a $1,000 face value bond that pays $70 annually in interest if market interest rates change from 9% to 10%?
O The coupon rate increases to 10%.
O The coupon rate remains at 9%.
O The coupon rate remains at 7%.
O The coupon rate decreases to 8%.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction:

VIEW

Step 2: Calculation:

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond? What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)
K← Consider the case of a two-year discount bond-that is, a bond that pays no coupon and pays its face value after two years rather than one year. Suppose the face value of the bond is $1,000, and the price is $850. What is the bond's yield to maturity? The bond's yield to maturity is%. (Round your response to two decimal places.)
Bond J has a coupon rate of 6 percent. Bond K has a coupon rate of 11 percent. Both bonds have 8 years to maturity, make semiannual payments, and have a YTM of 9 percent. If interest rates suddenly rise by 4 percent, what is the percentage price change of Bond J? O-20.85% O-18.85% O-19.85% O-20.83% If interest rates suddenly rise by 4 percent, what is the percentage price change of Bond K? 28.14% O-16.88% O-18.88% Ⓒ-18.86%
(b)You purchase the $110 bond today and sell it off next year at $108. What is its one-year rate of return (assume the bond’s coupon rate is 5% and its face value is $100)? If the expected inflation over the course of the year is 2%, what would the ex-ante real rate of return be for the bond on part (b)?
Bond J has a coupon rate of 3 percent and Bond K has a coupon rate of 9 percent. Both bonds have 13 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? Percentage change in price of Bond J=? Percentage change in price of Bond K=? What if rates suddenly fall by 2 percent instead? Percentage change in price of Bond J=? Percentage change in price of Bond K=?
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 -0.0057
Bond J has a coupon rate of 6 percent. Bond K has a coupon rate of 9 percent. Both bonds have 9 years to maturity, make semiannual payments, and have a YTM of 7 percent. If interest rates suddenly rise by 3 percent, what is the percentage price change of Bond J? -17.95% -15.97% -16.97% -17.97% If Interest rates suddenly rise by 3 percent, what is the percentage price change of Bond K? -14.82% -16.80% -16.82% 27.26% If interest rates suddenly fall by 3 percent, what is the percentage price change of Bond J? -17.99% 23.11% 23.09% -23.38% If interest rates suddenly fall by 3 percent, what is the percentage price change of Bond K? 21.46% -4.84% 21.34% -16.84%
Consider a two-year bond with a face value $1000 and a coupon rate 4.2%paid annually.(a) On the market, the 2-year interest rate is 3%. What is the fair marketprice for this bond?(b) When the interest rate increases to 5%, what would the bond pricebecome?(c) What if the interest rate falls to 1%?
Suppose the current interest rate on a one-year bond is 2% and the current interest rate on a two-year bond is 4%. The term premium on a two-year bond is 1%. According to the expectations hypothesis, what interest rate should we expect on a one-year bond next year? Answer as a percentage to one decimal place and do not include symbols (e.g. $, %, commas) in your answer. Answer:
A bond that pays no interest is called a zero-coupon bond. A $10,000 zero-coupon bond that matures in 10 years can be purchased today. If the expected annual rate of inflation is 3% and the buyer’s unadjusted MARR is 8%, what is the maximum that should be paid for the bond?
A $1,000 bond with a coupon rate of 5.7% paid semiannually has five years to maturity and a yield to maturity of 7%. If interest rates rise and the yield to maturity increases to 7.3%, what will happen to the price of the bond? A. fall by $14.37 B. rise by $11.97 C. fall by $11.97 D. The price of the bond will not change.
Suppose that the term structure of interest rates is: t 0.5 1 1.5 2 r 1% 1.2% 1.4% 1.8% Interest rates are annual interest rates that are semi-annually compounded. 1. Calculate the price and modified duration of a 1-year bond with a 6% coupon rate, with coupons paid semi-annually. The bond has a face value of 100.0 2. Calculate the price and modified duration of a 2-year bond with a 10% coupon rate, with coupons paid semi-annually. The bond has a face value of 100.0 3. Compare your results from 1 and 2 above. Which bond is more sensitive to changes in interest rates?