Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 6, Problem 20P
Summary Introduction
To determine: The maturity of a default-free security with yearly coupon payments and a yield to maturity of 4%.
Introduction:
A bond is a debt instrument with which the shareholder credits the cash to an entity which can be a government or an organization that scrounges finance for a distinct timeframe at a predefined interest rate.
Coupon rate is expressed as an interest rate on a fixed income security like a bond. It is also known as the interest rate that the bondholders get from their investment. It depends on the yield depending on the day the bond is issued.
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Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, and a maturity premium of 0.10% per year to maturity applies, i.e., MRP = 0.10. What rate of return would you expect on a 1-year (short term) Treasury security?
Assume the zero-coupon yields on default-free securities are as summarized in the following table:
Maturity
1 year
2 years
3 years
4 years
5 years
Zero-Coupon Yields
7.00%
7.60%
7.90%
8.30%
8.70%
What is the maturity of a default-free security with annual coupon payments and a yield to maturity of
7.00%?
Why?
What is the maturity of a default-free security with annual coupon payments and a yield to maturity of
7.00%?
A.
One year
B.
Two years
C.
Three years
D.
Four years
E.
Five years
The market price of a security is $50. Its expected rate of return is 14%. The risk-free rate is 6%, and the market risk premium is 8.5%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)? Assume that the stock is expected to pay a constant dividend in perpetuity.
Chapter 6 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 6.1 - What is the relationship between a bonds price and...Ch. 6.1 - The risk-free interest rate for a maturity of...Ch. 6.2 - If a bonds yield to maturity does not change, how...Ch. 6.2 - Prob. 2CCCh. 6.2 - How does a bonds coupon rate affect its...Ch. 6.3 - How do you calculate the price of a coupon bond...Ch. 6.3 - How do you calculate the price of a coupon bond...Ch. 6.3 - Explain why two coupon bonds with the same...Ch. 6.4 - There are two reasons the yield of a defaultable...Ch. 6.4 - What is a bond rating?
Ch. 6.5 - Why do sovereign debt yields differ across...Ch. 6.5 - What options does a country have if it decides it...Ch. 6 - A 30-year bond with a face value of 1000 has a...Ch. 6 - Assume that a bond will make payments every six...Ch. 6 - The following table summarizes prices of various...Ch. 6 - Suppose the current zero-coupon yield curve for...Ch. 6 - Prob. 5PCh. 6 - Prob. 6PCh. 6 - Suppose a five-year, 1000 bond with annual coupons...Ch. 6 - Prob. 8PCh. 6 - Explain why the yield of a bond that trades at a...Ch. 6 - Prob. 10PCh. 6 - Prob. 11PCh. 6 - Consider the following bonds: Bond Coupon Rate...Ch. 6 - Prob. 14PCh. 6 - Prob. 17PCh. 6 - Prob. 18PCh. 6 - Prob. 19PCh. 6 - Prob. 20PCh. 6 - Prob. 22PCh. 6 - Prob. 23PCh. 6 - Suppose you are given the following information...Ch. 6 - Prob. 26PCh. 6 - Grumman Corporation has issued zero-coupon...Ch. 6 - The following table summarizes the yields to...Ch. 6 - Prob. 30PCh. 6 - Prob. 31PCh. 6 - A BBB-rated corporate bond has a yield to maturity...Ch. 6 - Prob. 33PCh. 6 - Prob. 34PCh. 6 - Prob. 35P
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 29. Which of the following has the greatest interest rate (price) risk?a. A 10-year, $1,000 face value, 10 percent coupon bond with semiannualinterest payments.b. A 10-year, $1,000 face value, 10 percent coupon bond with annualinterest payments.c. A 10-year, $1,000 face value, zero coupon bond.d. A 10-year $100 annuity.e. All of the above have the same price risk since they all mature in 10years.arrow_forwardIf a $5,000 zero coupon bond with a 10-year maturity has a market price of $1,508.30, what is its rate of return?arrow_forwardA.Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 6.60%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. a. 9.70% b. 9.12% c. 8.83% d. 8.54% e. 7.47% B. Beranek Corp has $625,000 of assets (which equal total invested capital), and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? a. $262,500 b. $202,500 c. $250,000 d. $195,000 e. $212,500arrow_forward
- 22. What is the price of a perpetuity that has a coupon of $50 per year and a yield to maturity of 2.5%? If the yield to maturity doubles, what will happen to its price?arrow_forward3. Suppose a bond with a 10% coupon rate and semiannual coupons, has a face value of $1,000, 20 years to maturity and is selling for $900. What is the yield to maturity? (Show Work)arrow_forwardRecall that on a one-year Treasury security the yield is 4.0000% and 4.8000% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.35%. What is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) a4.1666% b5.5882% c4.9019% d6.2254% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market’s estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.) a6.61% b5.46% c6.45% d6.69%arrow_forward
- What is the value today of zero coupon bond that matures in 21 years and has a par value of $1000 if the required rate of return is 5.87%? Assume annual discountingarrow_forwardAssume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 2.20 percent, and the 1-year interest rate is 2 percent. What is the forward rate according to the pure expectations theory? Group of answer choices 2.25% 2.20% 2.00% 2.40%arrow_forwardThe real risk-free rate is 2.36%, inflation is expected to be 4.75% this year, and the maturity risk premium is zero. What is the equilibrium rate of return on a 1-year Treasury security? (your answer as a percent and round your final answer to 2 decimal places.)arrow_forward
- Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 6.60%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.arrow_forwardSuppose the real risk-free rate is 3.00%, the average expected future inflation rate is 4.00%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Include the cross-product term, i.e., if averaging is required, use the geometric average. (Round your final answer to 2 decimal places.)arrow_forwardSuppose the real risk-free rate is 3.80% and the future rate of inflation is expected to be constant at 2.90%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Include cross-product terms, i.e., if averaging is required, use the geometric average.arrow_forward
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