Answered: Duration is defined as a weighted…

Duration is defined as a weighted average of the maturities of the cash payments. Suppose the weight assigned to the maturity of 1 year is W.

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 17P: Bond Value as Maturity Approaches An investor has two bonds in his portfolio. Each bond matures in 4...

See similar textbooks

Related questions

Q: Year 0123 4 Cash Flows $9,800 -4,300 -3,300 -2,500 -2,300 In

A: "Since you have posted a question with multiple sub-parts, we will solve first three sub- parts for…

Q: Expected Return of Common Stock Wooster Inc. has common stock with a market price of $120 per share.…

A: The concept of dividend discount model will be used and applied here. The dividend discount model…

Q: Consider four different stocks, all of which have a required return of 19% and a most recent…

A: For Four stocksRequired return of 19%Most recent dividend = $2.40 per share

Q: A project has annual cash flows of €-45,000, €39,000, €18,400 and €8,400. Required: What is the…

A: Payback period is the period required to recover initial amount of investment in the projects under…

Q: Amount of each rental payments

A: Present value illustrates the current value of a sum of money that will be received or paid in the…

Q: Sea Side, Incorporated, just paid a dividend of $2.20 per share on its stock. The growth rate in…

A: Current Dividend = $2.2Three year discount rate = 19%Next three year discount rate = 14%Growth rate…

Q: 4. How much must we invest at present in order to pay a series of recurring $1000 expenses which…

A: The PV of an investment refers to the combined value of the cash flows assuming that they are…

Q: Timothy Lawrence plans to borrow $5,000 and to repay it in 36 monthly installments. This loan is…

A: The add-on interest rate method is a way of calculating interest in which the interest is calculated…

Q: Two mutually exclusive investment projects have bee presented to your company. Project A' rate of…

A: The Rate of Return (ROR): It is the increase or decrease in the value of any investment with time as…

Q: An investor is considering the purchase of an existing suburban office building approximately five…

A: As per the given information:To determine:The estimated value for this property.The estimated…

Q: Sure Tea Company has issued 7.4% annual coupon bonds that are now selling at a yield to maturity of…

A: Time to maturity is the time period for which the bond is issued or the amount is financed through…

Q: When comparing investments that have different means, the measures the relative riskiness of each…

A: Risk in investment: There is certain level of risk that is attached to each investment type. The…

Q: Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln…

A: A tax shield is a benefit that any individual or corporate entity receives by using deductions that…

Q: You have taken a loan of $56,000.00 for 27 years at 5.5% compounded quarterly. Fill in the table…

A: Amortization table:Amortization table also known as amortization schdule is made to determine the…

Q: Yesterday, at the market close, the stock of Kevin Spellman, Inc. was trading at $200 per share, and…

A: Solution:-Stock split means the splitting of existing number of shares to multiple parts, i.e. each…

Q: A flexible policy would include ___(1)___ cash balances, and __(2) investments in inventory, while a…

A: Flexible Policy: A flexible policy involves low cash balances, small investments in inventory, and a…

Q: Question number 14 The Flores Family loves to go saling on the weekends Mr Flores has decided to…

A: Future value is an estimate of the future cash flows that may be received at a future date,…

Q: Altamonte Telecommunications has a target capital structure that consist of 70% debt and 30% equity.…

A: Following the Residual Dividend Model, a company prioritises capital investment and pays dividends…

Q: The most recent financial statements for Mixton, Incorporated, are shown here: Income Statement:…

A: Here,Sales $ 38,600.00Net Income $ 9,075.00Total Assets $…

Q: Find the finance charges on a 5 percent, 18-month, $1,000, single-payment loan when interest is…

A: We need to use simple interest method formula to calculate interest on loan.Simple interest…

Q: A loan for 50,000 has level payments to be made at the end of each year for 10 years at an annual…

A: Loan Installment is that amount under which borrower will pay the equal amount at the end of each…

Q: You are preparing to produce some goods for sale. You will sell them in one year and you will incur…

A: P - Current cost of goods i.e. $86,000r - Cost of capital i.e. 7.3%t - Period i.e. 1 YearTo…

Q: 1. Suppose the 1-year risk-free rate of return in the USA is 4.5%. The current exchange rate is 1…

A: The no-arbitrage opportunity between exchanging currency and investment through interest rate and…

Q: Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets…

A: (1) Net profit margin = (Net income / Sales ) x 100=>Net profit margin…

Q: how much will she have to invest today to achieve her goal?

A: Present value illustrates the current value of a sum of money that will be received or paid in the…

Q: What is the amount of money you would need to invest per month over 18 years at 3% interest…

A: The monthly investment over 18 years is equal to the total cost of $44,672. It is assumed that the…

Q: Using the simple interest method, find the monthly payments on a $2,000 installment loan if the…

A: Simple interest refers to the method of interest calculation where the principal amount remains the…

Q: Ashley and Duncan just created their January 2019 income and expense statement. They spent their…

A: A savings plan is a structured financial strategy that individuals or households use to…

Q: Question 23 Builtrite is considering purchasing a new machine that would cost $70,000 and the…

A: The final or the last cash flow of the project which includes the salvage value of the equipment is…

Q: you recently paid $13,275 for an investment that promises to pay $625 at the end of each 6 years,…

A: The rate of return is a financial metric that measures the gain or loss an investment relative to…

Q: Gabella's is an all-equity firm that has 36,000 shares of stock c interest and taxes of $57,600 and…

A: Repurchase is the purchase of own shares of the company and that is done to increase value for…

Q: nder Boomerang, Inc., is considering a new three-year expansion project that requires an initial…

A: Operating cash flows are the cash flow from the core operations of the company after adding non cash…

Q: Which of the following determine(s) the level of real interest rates? 1) The supply of savings by…

A: INTEREST RATE can be determined by the market forces of supply and demand.Investments and savings…

Q: Investments: Calculate how much you will have to save each month between now and then to have…

A: Savings at Retirement (FV) is $300,000.Number of Saving periods (n) is 780 (65 years 12…

Q: You are valuing an investment that will pay you $26,000 per year for the first 4 years, $36,000 per…

A: The value of the investment today is equal to the present value of all cash inflows from the…

Q: Project NPV (S6.3) A widget manufacturer currently produces 200,000 units a year. It buys widget…

A: NPV is time value based method of capital budgeting and is based on the time value of money and can…

Q: What is the current price of a bond maturing in 12 years with a coupon rate of 14% and a YTM of 13%

A: The price of a bond is calculated using PV function in excel with par or future value as FV, annual…

Q: Your brother owns a commercial electrical company. A friend of his is retiring and has offered to…

A: The PV of an investment refers to the combined value of the cash flows of the investment assuming…

Q: Your broker has developed a list of firms, their betas, and the return he expects the stock to yield…

A: Capital Asset Pricing Model (CAPM) is an alternative model to find out the cost of equity or the…

Q: If Evan wants to earn interest of $3,693.85 on her $15,000.00 savings in 4 years, at what nominal…

A: Future value of money is the amount of investment done plus interest accumulated over the time.

Q: Use the binomial tree technique to price a one year American call option with strike price $65,…

A: An American call option is a financial contract that gives the holder the right, but not the…

Q: loan of 1000 at a nominal rate of 12 percent convertible monthly is to be repaid by six monthly…

A: Loans are paid in equal payments and these payments carry the interest and loan payments.

Q: You want to buy a $20,000 car. The company is offering a 4% interest rate for 48 months (4 years).…

A: A Loan amortization is the process of determining the monthly payments of the loan with interest and…

Q: South Side, Inc., is considering opening a branch in another state. The operating cash flow will be…

A: An internal rate of return is employed to assess the profitability of an investment. It is a…

Q: The principal P is invested at the interest rate of r/year for t years. (Use a 365-day year.) P =…

A: Compound interest rate refers to the rate at which interest is calculated and added to the principal…

Q: Company changed from privately held to publicly held. Slowing sales have increased the potential for…

A: In the context of risk management and audit, the term "control risk" refers to the danger that an…

Q: What is the yield to maturity of this bond?

A: Yield to maturity is the annual return that a bond holder would receive if they held the bond until…

Q: A 5-year $10,000 loan with a 15-year amortization period is being offered at the rate of 10%…

A: When the borrower avails a loan from the lender, he has to pay a rate of interest on the borrowed…

Q: Present value of annuities and complex cash flows) You are given three investment alternatives to…

A: Present value is an estimate of the present value of future cash values that may be received at a…

Q: How much money she will have when she retiared at age of 60, if she invested all her saving in an…

A: We need to break this question into 2. We need to determine the FV of $300 payments for 5 years at…

Question

Consider a coupon bond with an 8% annual coupon rate, a 10% interest rate, and a
$1000 face value. The bond will mature in 4 years. What is the duration of this bond? Duration is
defined as a weighted average of the maturities of the cash payments. Suppose the weight
assigned to the maturity of 1 year is W. Show your work

A: Duration=2.28 and W=7.77%
B: Duration=3.56 and W=20.5%
C. Duration=3.56 and W=23.1%
D. Duration=3.56 and W=7.77%

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Calculation in Excel

VIEW

Step 2: Formula Used for calculation

VIEW

Solution

VIEW

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

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?
Bond Value as Maturity Approaches An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of 1,000, and has a yield to maturity equal to 9.6%. One bond, Bond C, pays an annual coupon of 10%; the other bond, Bond Z, is a zero coupon bond. Assuming that the yield to maturity of each bond remains at 9.6% over the next 4 years, what will be the price of each of the bonds at the following time periods? Fill in the following table:
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?
Current Yield for Annual Payments Heath Food Corporations bonds have 7 years remaining to maturity. The bonds have a face value of 1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their current yield?
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 Current Yield You just purchased a bond that matures in 5 years. The bond has a face value of 1,000 and an 8% annual coupon. The bond has a current yield of 8.21%. What is the bonds yield to maturity?