PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 3, Problem 15PS
Duration Find the spreadsheet for Table 3.4 in Connect. Show how duration and volatility change if (a) the bond’s coupon is 8% of face value and (b) the bond’s yield is 6% Explain your finding.
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A newly issued bond with 1 year to maturity has a price of $1,000, which equals its face value. The coupon rate is 15% and the probability of default in 1 year is 35%. The bond’s payoff in default will be 65% of its face value. a. Calculate the bond’s expected return. b. Use a data table to show the expected return as a function of the recovery percentage and the price of the bond. Please show how you got part B using all functions.
If possible, please calculate using excel and show formulas.
The spot interest rates in the following downward-sloping term structure are: r1 = 4.6%, r2 = 4.4%, r3 = 4.2%, and r4 = 4.0%, r5=2%. Assume face value is $1,000.
Calculate bond prices of a 5% coupon bond.
Calculate the duration and convexity of a bond, 20 years to maturity bond and 6% coupon rate. Assume a flat yield curve at 4%. (You can use Macaulay or effective versions for duration and convexity).
Chapter 3 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 3 - (PRICE) In February 2009, Treasury 8.5s of 2020...Ch. 3 - (YLD) On the same day, Treasury 3.5s of 2018 were...Ch. 3 - (DURATION) What was the duration of the Treasury...Ch. 3 - (MDURATION) What was the modified duration of the...Ch. 3 - Bond prices and yields A 10-year bond is issued...Ch. 3 - Bond prices and yields The following statements...Ch. 3 - Bond prices and yields Construct some simple...Ch. 3 - Bond prices and yields A 10-year German government...Ch. 3 - Bond prices and yields A 10-year German government...Ch. 3 - Bond prices and yields A 10-year U.S. Treasury...
Ch. 3 - Bond returns If a bonds yield to maturity does not...Ch. 3 - Bond returns a. An 8%, five-year bond yields 6%....Ch. 3 - Prob. 10PSCh. 3 - Duration True or false? Explain. a....Ch. 3 - Duration Here are the prices of three bonds with...Ch. 3 - Duration Calculate the durations and volatilities...Ch. 3 - Prob. 14PSCh. 3 - Duration Find the spreadsheet for Table 3.4 in...Ch. 3 - Prob. 16PSCh. 3 - Spot interest rates and yields Which comes first...Ch. 3 - Prob. 18PSCh. 3 - Spot interest rates and yields Look again at Table...Ch. 3 - Prob. 20PSCh. 3 - Spot interest rates and yields Assume annual...Ch. 3 - Spot interest rates and yields A 6% six-year bond...Ch. 3 - Spot interest rates and yields Is the yield on...Ch. 3 - Prob. 24PSCh. 3 - Measuring term structure The following table shows...Ch. 3 - Term-structure theories The one-year spot interest...Ch. 3 - Term-structure theories Look again at the spot...Ch. 3 - Real interest rates The two-year interest rate is...Ch. 3 - Prob. 30PSCh. 3 - Bond ratings A bonds credit rating provides a...Ch. 3 - Prob. 32PSCh. 3 - Price and spot interest rates Find the arbitrage...Ch. 3 - Prob. 34PSCh. 3 - Prices and spot interest rates What spot interest...Ch. 3 - Prices and spot interest rates Look one more time...
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- Give typing answer with explanation and conclusion calculate the price of a bond, where F is the face value, c is the coupon rate, N is the number of years to maturity, and i is the interest rate. F=$10,000, c=7%, N- is infinity (bond never matures), i=6%arrow_forwardAssume a 2 year, 5 year, 10 year and 30 year bond all pay a coupon rate of 4%. Test how the bond prices change as the yield to maturity increases from 1 % to 8% (change YTM in increments of 1%). Plot the results on a graph.arrow_forwardWhat are the cash flows you receive from a $1,000 coupon bond with a 6% coupon rate and: a) semiannual coupon payments; b) annual coupon payments; Calculate the price of the bond if its yield to maturity is 3%. Calculate the price of the bond if its yield to maturity increases to 5%. Compare your answers and explain why the prices are different. Is the bond trade at discount, par, or premium in each case?arrow_forward
- Find the duration of a 6% coupon bond making annualcoupon payments if it has three years until maturity and a yieldto maturity of 6%. Please explain and write the fomula in detail (do not use Excel)arrow_forwardCalculate the duration for a $1000, 4-year bond with a 4.5% annual coupon, currently selling at par. Use the duration to estimate the percentage change in the bond’s price for a decrease in the market interest rate to 3.5%. Use the bond price volatility equation to compute the bond price volatility. Compare the result with the estimated percentage change in the bond price.arrow_forwardIf you have a coupon bond, its face value is $1,000 and the coupon rate is 4%. Complete the following table, then calculate the rate of return for the bond. If you know that it was purchased at the nominal value, comment on the results. due date return at maturity the price 2 0.02 3 0.04 5 0.06 Present Value Annuity value % n value % n 0.961 0.02 2 1.97 0.02 2 0.925 0.04 2 1.89 0.04 2 0.889 0.04 3 2.78 0.04 3 0.906 0.02 5 4.71 0.02 5 0.747 0.06 5 4.21 0.06 5arrow_forward
- Solve each of the following questions using both pricing formulas and Excel. 2. A zero-coupon bond has a face value of $21,000 and a maturity of 8 years. Similar bonds have an interest rate of 5% per year. What is the price of this bond?arrow_forwardSuppose that a bond with an 8% coupon rate and semiannual coupons has a face value of $1,000, 10 years to maturity. The required rate (Yield to Maturity, YTM) is 5%. Draw a timeline to identify the amount and timing of cash flows obtained with the bond and calculate the bond value. Redo part (a) if YTM is 10%. Next, use the results of parts (a) and (b) to show the relationship among YTM, coupon rate and bond value.arrow_forwardCalculate the duration (and price) of a bond with the following characteristics: A semi-annual payment bond with a $1,000 face value, a 4,5% coupon rate, a 7.8% YTM, and 8 years to maturity. Show your table of calculations or show Excel inputs if using the Excel commands.arrow_forward
- Consider a bond with a 4% annual coupon and a face value of $1,000. Complete the following table. What relationships do you observe between years to maturity, yield to maturity, and the current price?arrow_forwardCan you explain step by step how you get $1,104.23 by plugging in the numbers and using the formula below?: Given: Coupon rate (6.55%), maturity (15 years), purchase YTM (6.15%). Adjust coupon and maturity for semi-annual periods: Coupon per period = 6.55% / 2 = 3.275%. Number of periods = 15 years * 2 = 30 periods. Use the bond pricing formula: Price = (Coupon * (1 - (1 + YTM/2)^-Number of periods)) / (YTM/2 + (1 + YTM/2)^-Number of periods) Plug in the values: Price ≈ $1,104.23.arrow_forwardSuppose you purchase a $1000 Face-Value Zero-Coupon Bond with maturity 30 years and yield to maturity 4% quoted with annual compounding. Show the bond cash flows on a time line and compute the current price of the bond Draw a graph to illustrate how the price of this bond will change as it gets closer to maturity – Price (on y axis) vs Time (on x axis). Why is a zero-coupon bond more sensitive to interest rate changes than similar coupon bearing bonds (2 or 3 sentences)?arrow_forward
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What is modified duration? | Dejargoned; Author: Mint;https://www.youtube.com/watch?v=5yLIybzb_OQ;License: Standard YouTube License, CC-BY