Which one of the following statements concerning debt instruments is correct?O A) A 25-year bond with a coupon rate of 9% and 1 year to maturity has more interestrate risk than a 10-year bond with a 9% coupon issued by the same firm with 1 yearto maturity.O B) The coupon rate and yield of an outstanding long-term bond will change over timeas economic factors change.O C) For long-term bonds, price sensitivity to a given change in interest rates is greaterthe longer the maturity of the bond.O D) A bond with 1 year to maturity would have more interest rate risk than a bond with15 years to maturity

Modified duration(Price volatility)=D/(1+ytm) Duraion(D)=Sum of WX/Sum of W Years(X) Cash flow…

Answered: Which one of the following statements…

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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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.)
Bond Valuation and Changes in Maturity and Required Returns Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a 1,000 par value, a 10% coupon rate, and semiannual interest payments. a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell? b. Suppose that 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell? c. Suppose that 2 years after the issue date (as in Part a) interest rates fell to 6%. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the bonds over time?
Describe and differentiate between a bonds (a) current yield and (b) yield to maturity. Why are these yield measures important to the bond investor? Find the yield to maturity of a 20-year, 9 percent, 1,000 par value bond trading at a price of 850. Whats the current yield on this bond?
What do you have to do to the interest rate and years of maturity if a bond pricing problem tells you that interest is compounded quarterly?
Suppose there is a large probability that L will default on its debt. For the purpose of this example, assume that the value of Ls operations is 4 million (the value of its debt plus equity). Assume also that its debt consists of 1-year, zero coupon bonds with a face value of 2 million. Finally, assume that Ls volatility, , is 0.60 and that the risk-free rate rRF is 6%.
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?
If the pure expectations theory of the term structure is correct, which of the following statements would be CORRECT? a. If a 1-year Treasury bill has a yield to maturity of 7% and a 2-year Treasury bill has a yield to maturity of 8%, this would imply the market believes that 1-year rates will be 7.5% one year from now. b. The yield on a 5-year corporate bond should always exceed the yield on a 3-year Treasury bond. c. Interest rate (price) risk is higher on long-term bonds, but reinvestment rate risk is higher on short-term bonds. d. An upward-sloping yield curve would imply that interest rates are expected to be lower in the future. e. Interest rate (price) risk is higher on short-term bonds, but reinvestment rate risk is higher on long-term bonds
Which of the following statements is CORRECT? a. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant. b. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. c. You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline. d. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates. e. The time to maturity does not affect…
Assuming that the bond with the coupon you computed in b.4 were issued today, show to what the market price of that bond in b.4 would change if the bond yield to maturity fell by 2% shortly after it was issued at par value (with the change in the yield to maturity after issue occurring due to a decline in yields on 30-year T-bonds and/or a reduction in the company’s default risk) semi-annual payments and sells for its par value/principal amount of $1000 per bond? Market Rate = 4.97%-2%

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