Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 4, Problem 15P
Summary Introduction
To determine: The best estimate of the nominal interest rate
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Given the indicated maturities listed in the following table, assume the following yields for US Treasury securities:
INTEREST RATE (Percent)
On the following graph, plot the yield curve implied by these interest rates. Place a blue point (circle symbol) at each maturity and interest rate in the
table, and the yield curve will draw itself.
1
0
Maturity (Years) 1
Yield (%)
10
9
8
0
5
5 10 20 30
3.6 5.5 5.5 4.2 4.0
10
15
20
MATURITY (Years)
25
30
Yield Curve
Absalom Energy’s 14% coupon rate, semiannual payment, $1,000 par valuebonds that mature in 30 years are callable 5 years from now at a price of$1,050. The bonds sell at a price of $1,353.54, and the yield curve is flat.Assuming that interest rates in the economy are expected to remain at theircurrent level, what is the best estimate of the nominal interest rate on newbonds issued in 5 years?
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orrect Answer
A company is promising a coupon payment of $46 in 2.03 years.
A risk free government bond of the same maturity is yielding
1.66% per year. The credit spread for the promised payment by
the company is 1.24% per year. Both the yield and the spread
are stated on a continuously compounded basis.
What is the present value of the expected loss on the promised
payment?
1.11 margin of error +/-50
Chapter 4 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 4 - Short-term interest rates are more volatile than...Ch. 4 - The rate of return on a bond held to its maturity...Ch. 4 - If you buy a callable bond and interest rates...Ch. 4 - A sinking fund can be set up in one of two ways....Ch. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Current Yield for Annual Payments Heath Food...Ch. 4 - Determinant of Interest Rates
The real risk-free...Ch. 4 - Default Risk Premium A Treasury bond that matures...Ch. 4 - Prob. 6P
Ch. 4 - Bond Valuation with Semiannual Payments
Renfro...Ch. 4 - Prob. 8PCh. 4 - Bond Valuation and Interest Rate Risk The Garraty...Ch. 4 - Prob. 10PCh. 4 - Prob. 11PCh. 4 - Bond Yields and Rates of Return A 10-year, 12%...Ch. 4 - Yield to Maturity and Current Yield You just...Ch. 4 - Current Yield with Semiannual Payments
A bond that...Ch. 4 - Prob. 15PCh. 4 - Interest Rate Sensitivity
A bond trader purchased...Ch. 4 - Bond Value as Maturity Approaches An investor has...Ch. 4 - Prob. 18PCh. 4 - Prob. 19PCh. 4 - Prob. 20PCh. 4 - Bond Valuation and Changes in Maturity and...Ch. 4 - Yield to Maturity and Yield to Call
Arnot...Ch. 4 - Prob. 23PCh. 4 - Prob. 1MCCh. 4 - Prob. 2MCCh. 4 - How does one determine the value of any asset...Ch. 4 - Prob. 4MCCh. 4 - What would be the value of the bond described in...Ch. 4 - Suppose a 10-year, 10% semiannual coupon bond with...Ch. 4 - Prob. 9MCCh. 4 - Prob. 10MCCh. 4 - Prob. 11MCCh. 4 - Prob. 12MCCh. 4 - Prob. 14MCCh. 4 - Prob. 15MCCh. 4 - Prob. 16MCCh. 4 - Prob. 17MC
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- YIELD CURVES Suppose the inflation rate is expected to be 7% next year, 5% the following year, and 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1 year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5 year or longer term T-bonds. a. Calculate the interest rate 1-,2-,3-,4-,5-,10- and 20-year Treasury Securities and plot the yield curve. b. Suppose a AAA-rated company (which is the highest bond rating a firm can have) had bonds with the same maturities as the Treasury bonds. Estimate and plot what you believe a AAA-rated company’s yield curve would look like on the same graph with the treasury bond yield curve. (Hint: think about the default risk premium on its long term versus in short-term bonds) c. On the same graph, plot the approximate yield curve of…arrow_forwardDraw the yield curve described as follows: • Interest rates: 2% in year 1; 2.5% in year 2; 3% in year 3; 4.5% in year 4. • Term premiums: 0.75% for a one-year bond, rising by 0.25% for each additional year of maturity. What does this yield curve suggest is the predominant short to medium-term economic outlook among market participants?arrow_forwardComplete problem: Yield to Maturity for Annual Payments XYZ Corporation' s bonds have 14 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 $950. What is their yield to maturity? Show your work.arrow_forward
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