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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Chapter 7, Problem 36QP
Summary Introduction
To determine: The reason for having negative yield to maturity, and the possibility of buying a negative yield bond
Introduction:
A bond refers to the debt securities issued by the governments or corporations for raising capital. The borrower does not return the face value until maturity. However, the investor receives the coupons every year until the date of maturity.
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80
S07-20 Interest Rate Risk [LO2]
Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both
bonds have 14 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? (A negative answer should be indicated by a minus sign. Do not round
intermediate calculations and enter your answers as a percent rounded to 2 decimal
places, e.g., 32.16.)
Percentage change in price of Bond J
Percentage change in price of Bond K
-21.59%
-17.55%
What if rates suddenly fall by 2 percent instead? (Do not round intermediate
calculations and enter your answers as a percent rounded to 2 decimal places, e.g.,
32.16.)
Percentage change in price of Bond J
Percentage change in price of Bond K
29.74 %
23.33%
[Related to the Apply the Concept: "How to Follow the Bond Market: Reading the Bond Tables ] Consider the following information on two U.S. Treasury
bonds
Maturity
July 31, 2024
Coupon
1.625
July 31, 2024
2.000
Briefly explain how two securities that have the same yield to maturity can have different asked prices
OA. Bond A has a low coupon rate and a lower price. Bond B has a higher coupon rate and a higher price. Because of the bond price formula, if coupon rates
rise, the yield will fall, which requires prices to fall to keep the yield the same. If both bonds have the same risk profile, the law of one price brings bond
yields to the same level
Bond A
Bond B
Bid
101.8984
103.4141
Asked
101.9141
103.4297
Chg
0:5000
0.5000
Asked yield
1.151
1.151
OB. Bond A has a low coupon rate and a lower price. Bond B has a higher coupon rate and a higher price, Because of the bond price formula, if coupon rates
fall, the yield will rise, which requires prices to rise to keep the yield the same. If…
Q No. 1 Explain why you agree or disagree with the following statements.
Treasury bonds are riskier than corporate bonds.
All other things held constant; the future value of an ordinary annuity is always having a higher future value than annuity due.
All other things held constant, the price or interest rate risk of short-term bond is always lower than long-term bond.
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. In recent news, the Bank of England (BOE) announced that it will raise interest rates as inflation in the UK reaches record highs. Required Given the expected increase in interest rates, what type of bond could a firm issue if they want the option of paying off their debt before maturity? Explain in detail. Would this type of bond be more or less desirable to the buyer of the bond? Why or why not?arrow_forwardWhy would à cofmpally LO 2 6.15 Bond Prices versus Yields What is the relationship between the price of a bond and its YTM? b. Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par a. value? What is the relationship between the current yield and YTM for premium bonds? For discount bonds? For bonds selling at par с. value?arrow_forwardN1 Q21. Which of the following statements about bonds are true? a. The bond price and yield of the bonds are positively related. b. Long-term bonds are more responsive to interest rate change than short-term bonds. c. All other answers are correct. d. If interest rates are expected to decrease, more investors will prefer holding short-term bonds.arrow_forward
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