A 151. Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal government or bonds issued by state and local governments (that is, they considerthe bonds the same with respect to default risk, information costs, and liquidity). Suppose that state governments have issued perpetuities (or consoles) with $77 coupons and that the federalgovernment has also issued perpetuities with $77 coupons. If the state and federal perpetuities both have after-tax yields of 5%, what are their pre-tax yields? (Assume that the relevant federalincome tax rate is 38.09%)The pre-tax yield on the state perpetuity will be. (Round your response to two decimal places)

Pre-tax yield refers to the yield or return on an investment before accounting for taxes. It is the…

Answered: Suppose that, holding yield constant,…

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

Chapter11: Notes, Bonds, And Leases

Section: Chapter Questions

Problem 8Q

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Similar questions

Explain why a positive yield spread typically exists between government and corporate bonds of the same maturity and liquidity. What factors determine its magnitude?
Which of the following is most true? The nominal rate of a government long-term security can be used as a proxy for the real risk free rate. A direct relationship is exhibited between the investors’ willingness to supply funds and the interest rates of securities. Finance managers tend to favor more on long-term financing if the nation’s Gross Domestic Product is expected to contract. Maturity risk premium is always included in the nominal rate of any corporate security since corporations are perceived as less riskier than government.
True of False Bond holders have voting rights and common shareholders do not. Because the likelihood of the U.S. Government paying back their debts is nearly 100%, U.S. bonds are classified as "risk free" investments. In general, a project or investment with a high standard deviation is viewed as less risky than one with a low standard deviation. When the present value of a bond exceeds the future value of the bond, it is selling at a premium. Preferred stock has an advantage over common stock because preferred shareholders have voting rights and common stock holders do not.
Suppose that Verizon issues two bonds with identical coupon rates and maturity dates. One bond is callable, however, whereas the other is not. Callable bonds sell at a lower price. Describe in at most three sentences a market condition where Verizon can use callable bonds to reduce cost of debt capital?
Please describe the different type of bonds and compare the yields associated with each type of bonds?Which factors influence the yield of each type of bonds? Which type of bond is associated with the lowest yield/interest rate out of all outstanding bonds during a particular time period? How the Fed could influence the bond yields? Would you expect bond yields/interest rates to be negative in either nominal or real terms? If so, can you provide such an example?
A bond trader observes the following information:• The Treasury yield curve is downward sloping.• Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.• Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.On the basis of this information, which of the following statements is most CORRECT? a. The corporate yield curve must be flat. b. Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping. c. A 10-year Treasury bond must have a higher yield than a 10-year corporate bond. d. A 10-year corporate bond must have a higher yield than a 5-year Treasury bond. e. A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
Quoted interest rates are rates stated in the tenor or contract of a particular security. All of the following are true about quoted rates, except: Nominal rates for both government and corporate issued securities have inflation premiums. The liquidity risk premium is used to compensate investors for the possibility of difficulty in converting the security into cash The short-term government securities do not possess any liquidity risk All long-term securities, regardless of the issuing entity, possess risk of changes in prices reflected in the presence of default risk premium
Which of the following statements correctly describes the relationship between a long-term bond’s market value, its coupon rate and the relevant yield to maturity? Group of answer choices A) More than one of the other statements are correct B) None of the other statements are correct C) A government bond with a fixed coupon rate may be valued below its’ face value even though the promised cash flows are effectively riskless. D) If at any point in the bond’s life its coupon rate is less than the market determined yield to maturity, its market value at that time will be less than the face value of the bond. E) When bonds are initially issued, the coupon rate is generally set equal to the required yield to maturity so that the company can issue the bonds at their face value.
You are given the following details of three default free government bonds. Assume that one can take long (buy) and short (sell) positions in these bonds. CF stands for cash flow. Bond Current price Today CF Year 1 CF Year 2 A 95.24 100 0 B 89.85 0 100 C X 70 1070 Assuming that the current market prices of Bond A and Bond B are correct, then, what should be the current theoretical (fundamental) price of Bond C, as per the no-arbitrage principle, i.e., what is the value of X? [Do not round-off any numbers. If at all you want to round-off a number, round it off at 8 decimal places.]
Corporate bonds are riskier than US Treasury, so they pay default risk premium over what Treasury pays to stay competitive in the market. True False
The respective maturities of these newly issued debt instruments are approximately equivalent. Which one of the investments in the portfolio would be subject to the greatest relative amount of price volatility if interest rates were to change quickly a. Treasury bond.b. Zero-coupon bond.c. Corporate bond.d. Municipal bond.
Treasury bills typically provide higher average returns, both in nominal terms and in real terms, than long-term government bonds. True or False

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