On February 9, 2015, Hunter-Gratzner, Inc. issued a 10 year bond (with a typical $1000 face value) that had an annual coupon value of $42. We will assume that the 2022 coupon has just been redeemed. Initially (in 2015), the bond was sold at the premium price of $1,037.On February 9, 2022, this bond was selling for $972.The market rate of interest for a riskless corporate bond, of this maturity (i.e., a U.S. Treasury security), was 1.75% on February 9, 2015, which reflected market expectations about future rates of inflation.The market rate of interest for a riskless corporate bond, of this maturity (i.e., a U.S. Treasury security), was 2.05% on February 9, 2022, which reflects market expectations about future rates of inflation.Question: It is now February 9, 2022, and suddenly the Federal Reserve announces a massive program to buy more bonds. Instantly, the market rate of interest for a riskless corporate bond that would apply to this bond rises from 2.05% to 2.3%. If there is no change in the risk premium expected for this Hunter-Gratzner, Inc. bond, what will be this bond’s yield to maturity? [To 2 decimal places.] Following this, what must be the new selling price for this bond?

The yield-to-maturity(YTM) for bond is the combination of risk-free rate which is generally referred…

Answered: On February 9, 2015, Hunter-Gratzner,…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 17P

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On February 9, 2015, Hunter-Gratzner, Inc. issued a 10 year bond (with a typical $1000 face value) that had an annual coupon value of $42. We will assume that the 2022 coupon has just been redeemed.

Initially (in 2015), the bond was sold at the premium price of $1,037.
On February 9, 2022, this bond was selling for $972.
The market rate of interest for a riskless corporate bond, of this maturity (i.e., a U.S. Treasury security), was 1.75% on February 9, 2015, which reflected market expectations about future rates of inflation.
The market rate of interest for a riskless corporate bond, of this maturity (i.e., a U.S. Treasury security), was 2.05% on February 9, 2022, which reflects market expectations about future rates of inflation.

Question: It is now February 9, 2022, and suddenly the Federal Reserve announces a massive program to buy more bonds. Instantly, the market rate of interest for a riskless corporate bond that would apply to this bond rises from 2.05% to 2.3%. If there is no change in the risk premium expected for this Hunter-Gratzner, Inc. bond, what will be this bond’s yield to maturity? [To 2 decimal places.] Following this, what must be the new selling price for this bond?

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