Corporate Finance, Student Value Edition (4th Edition)
4th Edition
ISBN: 9780134101446
Author: Berk, Jonathan; DeMarzo, Peter
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 6, Problem 23P
Summary Introduction
To determine: Whether there is arbitrage opportunity on the given bond and, if so, how to take advantage of this opportunity.
Introduction:
Arbitrage opportunity is termed as making profit from buying a security from one market and selling it to another market, or taking benefit from imbalance in the price of security. It is considered as a riskless profit for the investor.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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
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
4.0%
4.3%
4.5%
4.7%
4.8%
What is the price today of a two-year, default-free security with a face value of $1,000 and an annual coupon rate of 6%? Does this bond trade at adiscount, at par, or at a premium?
What is the price today of a two-year, default-free security with a face value of $1,000 and an annual coupon rate of 6%?
The price is $_____. (Round to the nearest cent.)
****THIS IS A DIFFERENT QUESTION*********
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
5.70%
6.20%
6.40%
6.60%
6.80%
What is the price of a three-year, default-free security with a face value of
$1,000
and an annual coupon rate of
3%?
What is the yield to maturity for this bond?
What is the price of a three-year, default-free security with a face value of
$1,000
and an annual coupon rate of
3%?
The price is
$______________
(Round to the nearest cent.)
Chapter 6 Solutions
Corporate Finance, Student Value Edition (4th Edition)
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
Knowledge Booster
Similar questions
- Your client has decided that the risk of the bond portfolio is acceptable and wishes to leave it as it is. Now your client has asked you to use historical returns to estimate the standard deviation of Blandy’s stock returns. (Note: Many analysts use 4 to 5 years of monthly returns to estimate risk, and many use 52 weeks of weekly returns; some even use a year or less of daily returns. For the sake of simplicity, use Blandy’s 10 annual returns.)arrow_forwardAssume the zero-coupon yields on default-free securities are as summarized in the following table: (Click on the following icon in order to copy its contents into a spreadsheet.) Maturity (years) 1 2 3 4 5 Zero-coupon YTM 4.30% 4.70% 5.10% 5.30% 5.50% What is the price of a five-year, zero-coupon, default-free security with a face value of $1,000 Question content area bottom Part 1 The price is ___$enter your response here.(Round to the nearest cent.)arrow_forwardAssume 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% 8.20% 8.30% Consider a four-year, default-free security with annual coupon payments and a face value of $1,000 that is issued at par. What is the coupon rate of this bond? The par coupon rate is _____%arrow_forward
- Treasury spot rates are as follows in today's market: Maturity (years) 1 2 3 Spot rate 2% 2.7% 3.3% One year ago, a 3-year Treasury note ($1,000 face value, 3.5% coupon rate and pays annual coupon) was issued and today it has two years left to maturity and two cashflows left to pay. Part 1 If this security is fairly priced in today's market, what must be true about the YTM? Check all that apply: Being the complex average of 1-yr and 2-yr Treasury spot rates, YTM is quite close to 1-yr spot rate but quite far from 2-yr spot rate 3.3% > YTM > 2.7% YTM > 3.3% 2.7% > YTM > 2% Being the complex average of 1-yr and 2-yr Treasury spot rates, YTM is quite close to 2-yr spot rate but quite far from 1-yr spot rate YTM < 2% Part 2 If this security is under-priced but greater than $1,000 in today's market, what can you conclude about the YTM? Check all that apply: 3.3% > YTM > 2.7% 2.7% > YTM > 2% YTM must be greater than that…arrow_forwardDerive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with a coupon of 4.0% if it is currently selling at par and the probability distribution of its yield to maturity a year from now is as shown in the table below. (Assume the entire 4.0% coupon is paid at the end of the year rather than every 6 months. Assume a par value of $100.) (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) Economy Probability YTM price capital gain coupon interest HPR boom 0.25 10% normal growth 0.50 9% recession 0.25 8%arrow_forwardConsider the following zero‐coupon yields on default free securities: Maturity (years) 1 2 3 4 5 Zero‐Coupon YTM 5.80% 5.50% 5.20% 5.00% 4.80% The price today of a 3 year default free security with a face value of $1000 and an annual coupon rate of 6% is closest to: A. $1024.36 B. $1021 C. $1013 D. $1032arrow_forward
- An investor in Treasury securities expects inflation to be 2.15% in Year 1, 2.9% in Year 2, and 4.25% each year thereafter. Assume that the real risk-free rate is 2.1% and that this rate will remain constant. Three-year Treasury securities yield 6.30%, while 5-year Treasury securities yield 7.75%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3? Do not round intermediate calculations. Round your answer to two decimal places. %arrow_forwardNow suppose a financial institution has a duration gap of -4 years and $5 million in assets. The cheapest to deliver bond for Treasury futures contracts has a duration of 3 years. How will the manager hedge this interest rate risk? Assume the cheapest to deliver bond is trading at par.arrow_forwardstep by step solution 1) Consider the following zero-coupon yields on default-free securities: Maturity (years) 1 2 3 4 5 Zero-Coupon YTM 4.80% 4.50% 4.20% 4.00% 3.80% What is the price today of a 4-year default-free security with a face value of $1,000 and an annual coupon rate of 6%? Show all your work. 2) The ABC company has a bond outstanding with a face value of $2,000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 5% and that the coupon payments are to be made semi-annually. How much are each of the semi-annual coupon payments? Assuming the appropriate YTM on the ABC company bond is 8.8%, then at what price should this bond trade?arrow_forward
- Suppose the 1-year futures price on a stock-index portfolio is 1,914, the stock index currently is 1,900, the 1-year risk-free interest rate is 3%, and the year-end dividend that will be paid on a $1,900 investment in the market index portfolio is $40.a. By how much is the contract mispriced?b. Formulate a zero-net-investment arbitrage portfolio and show that you can lock in riskless profits equal to the futures mispricing.c. Now assume (as is true for small investors) that if you short sell the stocks in the market index, the proceeds of the short sale are kept with the broker, and you do not receive any interest income on the funds. Is there still an arbitrage opportunity (assuming that you don’t already own the shares in the index)? Explain.d. Given the short-sale rules, what is the no-arbitrage band for the stock-futures price relation-ship? That is, given a stock index of 1,900, how high and how low can the futures price be without giving rise to arbitrage opportunities?arrow_forwardAn analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. If the real risk-free rate is 4% and inflation is expected to be 17% each of the next 4 years, what is the yield on a 4-year security with no maturity, default, or liquidity risk?arrow_forwardAn investor in Treasury securities expects inflation to be 2.1% in Year 1, 2.7% in Year 2, and 3.65% each year thereafter. Assume that the real risk-free rate is 1.95% and that this rate will remain constant. Three-year Treasury securities yield 5.20%, while 5-year Treasury securities yield 6.00%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is ?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT