Consider a bond with a coupon of 4.6 percent, five years to maturity, and a current price of $1,046.10. Suppose the yield on the bond suddenly increases by 2 percent. a. Use duration to estimate the new price of the bond. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price b. Calculate the new bond price using the usual bond pricing formula. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price

Consider a bond with a coupon of 4.6 percent, five years to maturity, and a current price of $1,046.10. Suppose the yield on the bond suddenly increases by 2 percent. a. Use duration to estimate the new price of the bond. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price b. Calculate the new bond price using the usual bond pricing formula. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter12: Investing In Stocks And Bonds

Section: Chapter Questions

Problem 10FPE

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Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
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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?