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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Question
Chapter 26, Problem 12PS
a.
Summary Introduction
To discuss: Whether person X should purchase or sell this contract.
b.
Summary Introduction
To discuss: The way in which person X use bond futures contract to hedge.
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The Chief Financial Officer of a company would like to raise money for new equipment by floating a new bond issue. The CFO would like to receive $1000 (full face value) for each of the bonds she sells. After collecting the below bond market data, and if the bonds carry a rating of A and have a term of 10 years, what coupon rate should be included in the bond contract? Assume an annual coupon payment.
Security& Rating Maturity Face Coupon Price
Treasury 1 $ 1,000 0.00% $ 965.00
Treasury 3 $ 1,000 1.90% $ 939.06
Treasury 5 $ 1,000 4.30% $ 932.42
Treasury 10 $ 1,000 6.80% $ 1,007.12
Treasury 15 $ 1,000 6.60% $ 908.25
CorpA A 5 $ 1,000 8.10% $ 990.00
CorpB BB 10 $ 1,000 7.90% $ 859.88
CorpC AA 15 $ 1,000 7.00% $ 660.00
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?
The treasurer of a large corporation wants to invest $22 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.33 percent; that is, the EAR for this investment is 3.33 percent. However, the treasurer wants to know the money market yield on this instrument to make it comparable to the T-bills and CDs she has already bought. If the term of the instrument is 78 days, what are the bond equivalent and discount yields on this investment? (Do not round intermediate calculations. Enter your answers as a percent rounded to 3 decimal places.)
Bond equivalent yield
%
Discount yield
%
Chapter 26 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Prob. 3PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Prob. 7PSCh. 26 - Prob. 8PSCh. 26 - Prob. 9PSCh. 26 - Prob. 10PS
Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 12PSCh. 26 - Prob. 13PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Prob. 18PSCh. 26 - Prob. 20PSCh. 26 - Prob. 21PSCh. 26 - Prob. 22PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 25PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Risk management Petrochemical Parfum (PP) is...Ch. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - You are a vice president of Rensselaer Advisers...
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