How would you do this ? The prices of a set of zero-coupon government bonds with a face value of £100 and atime-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, £95.24, £91.57, £88.90,£87.14 and £86.26. These bonds can be assumed to be risk-free.You also observe the prices of a set of zero-coupon corporate bonds, just issued byManchester plc, each of which has a credit rating of BBB. Each bond has a face valueof £100. The prices of the bonds with time-to-maturity of 1, 2, 3, 4 and 5 years are,respectively, £88.50, £78.31, £69.31, £61.33 and £54.28.a) Using the prices of the zero-coupon government bonds, calculate the price of acoupon-bearing government bond with a face value of £10,000, a coupon rate of 5%per annum, and 5 years till maturity. Coupon payments are made at the end of eachyear only.b) Using the prices of the zero-coupon government bonds, calculate the yield-to-maturity for each of these five maturities.c) Comment on the shape of the yield curve. What does this yield curve indicate aboutthe market's prediction of future economic conditions? Explain your answer.d) Consider the zero coupon government bond with a maturity of 5 years mentionedat the start of the question. Describe how the Dirty Price of this bond will changethrough time, until maturity. Assume that its Yield to Maturity stays constant at alltimes.e) Calculate the default risk premium between the BBB yield curve and thegovernment bond yield curve, for each maturity from 1 to 5 years.f) What would happen to the prices of the zero coupon corporate bonds issued byManchester plc, if all the corporate bonds' credit ratings were downgraded to CCfrom BBB? Assume the yield to maturity of all the zero-coupon government bondsremain the same.PTO

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The prices of a set of zero-coupon government bonds with a face value of £100 and a time-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, £95.24, £91.57, £88.90, £87.14 and £86.26. These bonds can be assumed to be risk-free. You also observe the prices of a set of zero-coupon corporate bonds, just issued by Manchester plc, each of which has a credit rating of BBB. Each bond has a face value of £100. The prices of the bonds with time-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, £88.50, £78.31, £69.31, £61.33 and £54.28. a) Using the prices of the zero-coupon government bonds, calculate the price of a coupon-bearing government bond with a face value of £10,000, a coupon rate of 5%

The prices of a set of zero-coupon government bonds with a face value of £100 and a time-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, £95.24, £91.57, £88.90, £87.14 and £86.26. These bonds can be assumed to be risk-free. You also observe the prices of a set of zero-coupon corporate bonds, just issued by Manchester plc, each of which has a credit rating of BBB. Each bond has a face value of £100. The prices of the bonds with time-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, £88.50, £78.31, £69.31, £61.33 and £54.28. a) Using the prices of the zero-coupon government bonds, calculate the price of a coupon-bearing government bond with a face value of £10,000, a coupon rate of 5%

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter20: Hybrid Financing: Preferred Stock, Warrants, And Convertibles

Section: Chapter Questions

Problem 7Q

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You are an investment manager evaluating two corporate bonds, each with a maturity value of $100,000. Each bond matures in exactly 10 years and each bond has a yield-to-maturity (YTM) of 5%. Bond 1 pays a coupon of 8% and Bond 2 pays a coupon of 3%. Without doing any math, which bond trades at a higher price? Which bond is more sensitive to changes in interest rates? If both bonds have the identical maturity date and YTM, then why do they trade at different prices? Is this a violation of The Law of One Price ? If you buy Bond 1, what is the NPV of the cash flows?
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