Credit Risk. A bond's credit rating provides a guide to its risk. Suppose that long-term bonds rated Aa currently offer yields to maturity of 7.5%. A-rated bonds sell at yields of 7.8%. Sup- pose that a 10-year bond with a coupon rate of 7.6% is downgraded by Moody's from an Aa to A rating. (LO6-5) a. Is the bond likely to sell above or below par value before the downgrade? b. Is the bond likely to sell above or below par value after the downgrade?

Credit Risk. A bond's credit rating provides a guide to its risk. Suppose that long-term bonds rated Aa currently offer yields to maturity of 7.5%. A-rated bonds sell at yields of 7.8%. Sup- pose that a 10-year bond with a coupon rate of 7.6% is downgraded by Moody's from an Aa to A rating. (LO6-5) a. Is the bond likely to sell above or below par value before the downgrade? b. Is the bond likely to sell above or below par value after the downgrade?

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter5: The Cost Of Money (interest Rates)

Section: Chapter Questions

Problem 20PROB

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33. All treasury securities have a yield to maturity of 7 percent--so theyield curve is flat. If the yield to maturity on all Treasuries were todecline to 6 percent, which of the following bonds would have thelargest percentage increase in price?a. 15-year zero coupon Treasury bond.b. 12-year Treasury bond with a 10 percent annual coupon.c. 15-year Treasury bond with a 12 percent annual coupon.d. 2-year zero coupon Treasury bond.e. 2-year Treasury bond with a 15 percent annual coupon.
A bond's credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 7.5% A-rated bonds sell at yields of 8% A10-year bond with a coupon rate of 7% is trading at 96.55, which represents a yield of 7.5%. If it is downgraded by Moody's from Aa to A rating, will its price rise or fall? What will the price be before and after?
a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating?b. What is the credit spread on AAA-rated corporate bonds?c. What is the credit spread on B-rated corporate bonds?d. How does the credit spread change with the bond rating? Why? Security Yield Treasury 3.120AAA corporate 3.874BBB corporate 4.521B corporate 5.328
Use the following data to answer Questions 35 through 37.An analyst observes a 20-year, 8% option-free bond with semi-annual coupons. The required semiannual-pay yield to maturity on this bond was 8%, but suddenly it drops to 7.25%. 35. As a result of the drop, the price of this bond:A. will increase.B. will decrease.C. will stay the same 36. Prior to the change in the required yield, what was the price of the bond?A. 92.64.B.100.00.C. 107.85. 37. The percentage change in the price of this bond when the rate decreased is closest to:A. 7.86%B. 7.79%C. 8.00%.
33. The yield curve is flat and all Treasury securities have a yield to maturity of 7%. What of the following bonds will see the highest percentage rise in price if the yield to maturity for all Treasuries fell to 6%?a. 15-year no-interest loan Bonds issued by the Treasury Department.b. A Treasury bond with a 12-year maturity and a ten percent nominal coupon.c. A Treasury bond with a 15-year maturity and a 12-percent annual coupon.d. A two-year zero-coupon period Bonds issued by the Treasury Department.e. A 15 percent nominal coupon 2-year Treasury bond
Which of the following observations is the most accurate? 34.A callable bond will have a lower required rate of return than a noncallable bond, assuming all other factors remain stable.b. If all other factors were equal, a company would choose to issue noncallable bonds over callable bonds.c. From the perspective of a traditional investor, reinvestment rate risk is higher than interest rate risk.d. If a 10-year, $1,000 par, zero coupon bond was sold at a price that offered buyers a 10% rate of return, and interest rates fell to the point where kd = YTM = 5%, we might be certain that the bond would sell for more than its $1,000 par value.e. If a 10-year, $1,000 par, zero coupon bond was sold at a price that provided borrowers with a 10% rate of return, and interest rates subsequently fell to the point where kd = YTM = 5%, we might be certain that the bond would sell at a discount below its $1,000 par value.
A bond for the Chelle Corporation has the following characteristics: Maturity 12 years Coupon 10% Yield to Maturity 9.5% Macaulay Duration 5.7 years Convexity 48 Noncallable a. Calculate the approximate price change for this bond using only its duration, assuming its yield to maturity increased by 150 basis points. Discuss (without calculations) the impact when you include the convexity effect. b. Calculate the approximate price change for this bond, using only duration, if its yield to maturity declined by 300 basis points. c. Calculate the approximate price change for this bond using both duration and convexity in the computation, once again assuming that its yield to maturity declined by 300 basis points. d. Discuss (without calculations) what would happen to your estimate of the price change if this was a callable bond.
15. A Treasury bond has an 8 percent annual coupon and a yield to maturityequal to 7.5 percent. Which of the following statements is most correct?a. The bond has a current yield greater than 8 percent.b. The bond sells at a price above par.c. If the yield to maturity remains constant, the price of the bond isexpected to fall over time.d. Statements b and c are correct.e. All of the statements above are correct.
A BBB-rated corporate bond has a yield to maturity of 7.4%. A U.S. Treasury security has a yield to maturity of 5.7%. These yields are quoted as APRs with semiannual compounding. Both bonds pay semi-annual coupons at a rate of 6.1% and have five years to maturity. a. What is the price (expressed as a percentage of the face value) of the Treasury bond? b. What is the price (expressed as a percentage of the face value) of the BBB-rated corporate bond? c. What is the credit spread on the BBB bonds? *round to three decimal places*
2) Which one of the following par-value 14% coupon bonds experiences a price change of $43 when the market yield changes by 50 basis points? A) The bond with a duration of 9 years B) The bond with a duration of 9.8 years C) The bond with a duration of 6.7 years D) The bond with a duration of 7.15 years Provide an accurate answer with justification.
The following table summarizes the yields to maturity on several one-year, zero-coupon securities: a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating? b. What is the credit spread on AAA-rated corporate bonds? c. What is the credit spread on B-rated corporate bonds? d. How does the credit spread change with the bond rating? Why?
you invested in a corporate bond that has a market price today of R983.87and a yield to maturity of 7%. This bond has a modified duration of 5.3. You believe that interest rates are going to rise by 106 basis points. What price do you expect your bond to trade at if this anticipated change in the yield occurs?Use the duration rule to calculate your answer , in rands (R), correctto Two decimal places.