Consider a 10-year bond making annual coupon payments at a rate of 8% with a face value of $1000. The market interest rate is 8%. Problem #7 Suppose you decide to buy the bond today and hold it for 10 years. What is the price of the bond and your holding period return if the term structure stays flat at 8% for the entire 10 years during which you hold the bond? Problem #8 Suppose you decide to sell the bond at the end of year 4. If the interest rate stays at 8% in years 1 and 2 and then shifts down to 5% and stays at 5% for the remaining 8 years, what price can you sell the bond at the time of transaction and what is your (holding period) return (in percentages)?

Consider a 10-year bond making annual coupon payments at a rate of 8% with a face value of $1000. The market interest rate is 8%. Problem #7 Suppose you decide to buy the bond today and hold it for 10 years. What is the price of the bond and your holding period return if the term structure stays flat at 8% for the entire 10 years during which you hold the bond? Problem #8 Suppose you decide to sell the bond at the end of year 4. If the interest rate stays at 8% in years 1 and 2 and then shifts down to 5% and stays at 5% for the remaining 8 years, what price can you sell the bond at the time of transaction and what is your (holding period) return (in percentages)?

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 22P: Yield to Maturity and Yield to Call Arnot International’s bonds have a current market price of...

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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.)
Yield to Maturity and Yield to Call Arnot International’s bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = $1,090). What is the yield to maturity? What is the yield to call if they are called in 5 years? Which yield might investors expect to earn on these bonds, and why? The bond’s indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5. In Year 5, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. Thus, in Year 6 they may be called at 108% of face value, in Year 7 they may be called at 107% of face value, and so on. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?
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