CFIN (with Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
5th Edition
ISBN: 9781305661653
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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Chapter 5, Problem 19PROB
Summary Introduction
Yield:
Yield is the return to be earned from an investment, if hold it for a specific period.
Yield includes payment of interest or dividend but does not include capital appreciation.
Calculate the yield as follows:
Given one year Treasury bond rate is 3.2%. Bond T matures in five years and yield is 5.3% and bond Q matures in 8 years and yield is 5.9%. Both bonds has same default risk and does not have liquidity premium.
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Students have asked these similar questions
Suppose that the yield curve shows that the one-year bond yield is 8 percent, the two-year yield is 7 percent, and the three-year yield
is 7 percent. Assume that the risk premium on the one-year bond is zero, the risk premium on the two-year bond is 1 percent, and the
risk premium on the three-year bond is 2 percent.
a. What are the expected one-year interest rates next year and the following year?
The expected one-year interest rate next year =
The expected one-year interest rate the following year
b. If the risk premiums were all zero, as in the expectations hypothesis, what would the slope of the yield curve be?
The slope of the yield curve would be (Click to select)
%
%
Suppose the real risk-free rate of interest is r=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year
for the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1 x (t-1) %, where t is number of years to
maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%,
The average inflation during the first 4 years is
What is the yield on a 4-year Treasury bond?
O 6.75%
O 8.90%
O 4.30%
O 7.05%
What is the yield on a 4-year BBB-rated bond?
O 7.50%
O 7.05 %
O 8.45%
8.90%
If the yield on a 5-year Treasury bond is 7.38% and the yield on a 6-year Treasury bond is 7.83%, the expected inflation in 6 years is
(Hint: Do not round intermediate calculations.)
1. Consider two bonds with a similar credit rating and pay the same coupon rate
per annum. The terms to maturity for Bond A and Bond B are 5 years and 10
years respectively. If inflation rate is expected to increase in the near future and
therefore leads to an increase in interest rate, what is the effect on the bond
prices? Which bond is likely to experience a larger effect due to the increase in
interest rate? Briefly explain your answer.
Chapter 5 Solutions
CFIN (with Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
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