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Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 23, Problem 6PS
Summary Introduction
To determine: The probability of having lower rating.
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The rate of return that you would earn if you bought a bond and held It to its maturity date is called the bond's yield to maturity (YTM). If Interest rates in the economy rise after a bond has been issued, what will happen to the bond's price and to Its YTM? Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond's price? Briefly explain with necessary numerical data.
The rate of return that you would earn if you bought a bond and held it to its maturity date is called the bond’s yield to maturity, or YTM. If interest rates in the economy rise after a bond has been issued, what will happen to the bond’s price and to its YTM? Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond’s price?
The rate of return you would get if you bought a bond and held it to its maturity date is called the bond's yield to maturity. If interest rates in the economy rise after a bond has been issued, what will happen to the bond's price and to its yield to maturity? Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond's price?
Chapter 23 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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- For an investor who plans to purchase a bond that matures in one year, the primary concern should be Select one: a. Yield to maturity b. Interest rate risk c. Coupon rate risk d. Exchange rate risk Clear my choicearrow_forwardThe rate of return on a bond held to its maturity date is called the bond’syield to maturity. If interest rates in the economy rise after a bond hasbeen issued, what will happen to the bond’s price and to its YTM? Doesthe length of time to maturity affect the extent to which a given change ininterest rates will affect the bond’s price? Why or why not?arrow_forwardAn increase in which factors increases the interest rate sensitivity (duration) of a bond? Check all that apply: Time to maturity Coupon rate Par value Bond ratingarrow_forward
- Which has morereinvestment rate risk: a 1-year bond or a 10-yearbond?arrow_forwardFor an investor who plans to purchase a bond that matures in one year, the primary concern should be Select one: a. Interest rate risk b. Coupon rate risk c. Exchange rate risk d. Yield to maturityarrow_forwardA bond’s expected return is sometimes estimated by its YTM and sometimes by its YTC. Underwhat conditions would the YTM provide a better estimate, and when would the YTC be better?arrow_forward
- The interest rate changes to i' in the second period. Evaluate the rates of return when you sell the bond after one period in the case of the change being (i) anticipated (ii) unanticipated. ? [P'arrow_forwardWhich of the following is correct? O If you pay a price above its face value to buy a bond, your return will be higher than its coupon rate. O When market rate is greater than coupon rate, the bond has a price below its face value. O When determining the value of a bond that payments semi-annual payments, one need to use semi-annual coupon rate to determine the coupon payments and semi-annual market rate as discount rate.arrow_forwardSome characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering the interest rate. It is calculated by adding the inflation premium to r*. It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. This premium is added when a security lacks marketability,…arrow_forward
- What is a bond's yield to maturity (YTM)? A. The expected return you'll earn if the bond issuer defaults B. The return you have made if you sell the bond today C. The same as the bond's coupon rate D. The return you'll earn if you hold the bond to maturity and yields stay the samearrow_forwardExplain whether the following statements are true or false. Justify your answer and solve all the three parts of this question a) If interest rate increase the price of a shorter maturity bond will decrease more then a longer maturity bond. b) If rating agencies downgrade a bond, the yield to maturiy on the bond will increase. c) the longer the duration of the bond, the higher will be the reinvestment riskarrow_forwardIf interest rates rise after a bond issue, what will happen to the bond’s price and YTM? Does the time to maturity affect the extent to which interest rate changes affect the bond’s price? (Again, an example might help you answer this question.)NOTE GIVE CONCEPTUAL ANSWER IN SHORTarrow_forward
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