INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 23, Problem 8CP
a.
Summary Introduction
To compute: The percentage change in the price of 10-year U.S. Treasury assuming a 50-basis-point change in the yield on the 10 year U.S. Treasury.
Introduction:
Basis point: It is supposed to the 1/100th of a percent or a value which is equal to 1/1000th. The values related to fixed income markets are denoted in terms of basis points.
b.
Summary Introduction
To compute: The percentage change in the price of K.C. bond using the regression equation. Assuming a 50-basis-point change in the yield on the 10 year U.S. Treasury.
Introduction:
Regression equation: A regression equation depicts the dependent relationship of two or more relationships. By using this equation, one can compute the extent of dependence between two variables.
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Students have asked these similar questions
A bond for the Chelle Corporation has the following characteristics:
Maturity - 12 years
Coupon - 10%
YTM - 9.5%
Macaulay duration - 5.7 years
Convexity – 48
Noncallabe
Calculate the approximate price change for this bond using both duration and convexity in the computation, one again assuming that its yield to maturity decline by 300 basis points.
Suppose the real risk-free rate is 2.80%, the average future inflation rate is 2.30%, a maturity premium of 0.25% per year to maturity applies, i.e., MRP = 0.25%(t), where t is the number of years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 2.50% applies to A-rated corporate bonds. What is the difference in the yields on a 5-year A-rated corporate bond and on a 10-year Treasury bond? Here we assume that the pure expectations theory is NOT valid, and disregard any cross-product terms, i.e., if averaging is required, use the arithmetic average.
a. 4.25 p.p.
b. 2.25 p.p.
c. 4.19 p.p.
d. 3.00 p.p.
e. 1.75 p.p.
Please explain process and show calculations
A company's 5-year bonds are yielding 8.35% per year. Treasury bonds with the same maturity are yielding 7.15% per year, and the real risk-free rate (r*) is 2.90%. The average inflation premium is 3.85%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 0.9%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
Chapter 23 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
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