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 9PS
Summary Introduction
To discuss: The reason why the valuation of company B’s debt is more complicated than company A’s.
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Students have asked these similar questions
Which statements is INCORRECT?
Treasury bonds (T-bond) have maturities up to 30 years
A coupon bond is called a discount bond when its market price is less than its fair price
A bond's yield to maturity (YTM) is the return an investor earns if holding the bond until its maturity
Treasury bills (T-bill) have maturities up to one year
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is
$1,000.
Maturity (Years)
1
2
3
4
5
Price
$983.78
865.89
797.92
732.00
660.24
Required:
a. Calculate the forward rate of interest for each year.
b. How could you construct a 1-year forward loan beginning in year 3?
c. How could you construct a 1-year forward loan beginning in year 4?
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000.
Maturity (Years)
1
2
3
4
5
Show Transcribed Text
B) How could you construct a 1-year forward loan beginning in year 3? (Face Value)
C) How could you construct a 1-year forward loan beginning in year 4? (Face Value)
Required A Required B
Complete this question by entering your answers in the tabs below.
Face value
Rate of synthetic loan
→ Show Transcribed Text
Price
$ 970.93
898.39
836.92
How could you construct a 1-year forward loan beginning in year 3?
Note: Round your Rate of synthetic loan answer to 2 decimal places.
Required A
776.20
685.42
Required B
Face value
Rate of synthetic loan
Required C
7.85 %
Required C
How could you construct a 1-year forward loan beginning in year 4?
Note: Round your Rate of synthetic loan answer to 2 decimal places.
Ċ
13.29 %
Chapter 23 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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