Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 4, Problem 9MC
Summary Introduction
Case summary:
Person SS and Person ST are the vice presidents of M insurance company and also the co-directors for pension and management division of the company. The new clients NM alliance wants company M to make a seminar to the mayors of the cities and person SS and person ST will take the actual presentation. Person X helps them by way of answering their questions.
Characters in the case:
- Person SS
- Person ST
- Person X
To determine: The yield on any debt security (
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Write a general expression for the yield on anydebt security (rd) and define these terms: real riskfree rate of interest (r*), inflation premium (IP),default risk premium (DRP), liquidity premium (LP),and maturity risk premium (MRP).
The interest rate on debt, r, is equal to the real risk-free rate plus an inflation premium plus a default risk premium plus a liquidity premium plus a maturity risk premium. The interest rate on debt, r, is also equal to the -Select-purerealnominalCorrect 1 of Item 1 risk-free rate plus a default risk premium plus a liquidity premium plus a maturity risk premium.The real risk-free rate of interest may be thought of as the interest rate on -Select-long-termshort-termintermediate-termCorrect 2 of Item 1 U.S. Treasury securities in an inflation-free world. A Treasury Inflation Protected Security (TIPS) is free of most risks, and its value increases with inflation. Short-term TIPS are free of default, maturity, and liquidity risks and of risk due to changes in the general level of interest rates. However, they are not free of changes in the real rate. Our definition of the risk-free rate assumes that, despite the recent downgrade, Treasury securities have no meaningful default risk.The…
Bond ratings primarily reflect which of the following?
Reinvestment risk,
Default risk ,
Interest rate risk,
Yield curve risk
Chapter 4 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 4 - Short-term interest rates are more volatile than...Ch. 4 - The rate of return on a bond held to its maturity...Ch. 4 - If you buy a callable bond and interest rates...Ch. 4 - A sinking fund can be set up in one of two ways....Ch. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Current Yield for Annual Payments Heath Food...Ch. 4 - Determinant of Interest Rates
The real risk-free...Ch. 4 - Default Risk Premium A Treasury bond that matures...Ch. 4 - Prob. 6P
Ch. 4 - Bond Valuation with Semiannual Payments
Renfro...Ch. 4 - Prob. 8PCh. 4 - Bond Valuation and Interest Rate Risk The Garraty...Ch. 4 - Prob. 10PCh. 4 - Prob. 11PCh. 4 - Bond Yields and Rates of Return A 10-year, 12%...Ch. 4 - Yield to Maturity and Current Yield You just...Ch. 4 - Current Yield with Semiannual Payments
A bond that...Ch. 4 - Prob. 15PCh. 4 - Interest Rate Sensitivity
A bond trader purchased...Ch. 4 - Bond Value as Maturity Approaches An investor has...Ch. 4 - Prob. 18PCh. 4 - Prob. 19PCh. 4 - Prob. 20PCh. 4 - Bond Valuation and Changes in Maturity and...Ch. 4 - Yield to Maturity and Yield to Call
Arnot...Ch. 4 - Prob. 23PCh. 4 - Prob. 1MCCh. 4 - Prob. 2MCCh. 4 - How does one determine the value of any asset...Ch. 4 - Prob. 4MCCh. 4 - What would be the value of the bond described in...Ch. 4 - Suppose a 10-year, 10% semiannual coupon bond with...Ch. 4 - Prob. 9MCCh. 4 - Prob. 10MCCh. 4 - Prob. 11MCCh. 4 - Prob. 12MCCh. 4 - Prob. 14MCCh. 4 - Prob. 15MCCh. 4 - Prob. 16MCCh. 4 - Prob. 17MC
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- Identify and discuss the relations among a bond’s coupon rate, the yield required by the market, and the bond’s price relative to par value (i.e., discount, premium, or equal to par).arrow_forwardhe interest rate used to calculate the present value of a bond's cash flows is often referred to as the:Group of answer choices dividend rate. discount rate. multiplier. yield to maturityarrow_forwardDoes the interest rate on a T-bond include a default risk premium? Explain.arrow_forward
- Briefly explain the following statement: Although long-term bonds are heavily exposedto interest rate risk, short-term T-bills are heavily exposed to reinvestment rate risk. Thematurity risk premium reflects the net effects of those two opposing forces.arrow_forwardDescribe each of the following methods for estimating the cost of equity: (a) the CAPM, (b) DCF,and (c) the bond-yield-plus-risk-premium.Where can you obtain inputs for each of thesemethods, and how accurate are estimates basedon each procedure? Can you state categoricallythat one method is better than the others, or doesthe “best” method depend on the circumstances?arrow_forwardExplain the following statement: “Although long-term bonds are heavily exposed to interest rate risk, short-term bills are heavily exposed to reinvestment rate risk. The maturity premium reflects the net effects of these two opposing forces”.arrow_forward
- Which of the following best describes a bond? Short-term debt security Long-term debt security Short-term equity security Long-term equity securityarrow_forwardWhen interest rates __________, the market required rates of return ________, and the bond prices will ________. If interest rates increase after a bond issue, the yield-to-maturity will ______,arrow_forward
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