Principles Of Managerial Finance, Student Value Edition (14th Edition)
14th Edition
ISBN: 9780133508000
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
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Textbook Question
Chapter 6, Problem 6.4P
Yield curve A firm wishing to evaluate interest rate behavior has gathered yield data on five U.S. Treasury securities, each having a different maturity and all measured at the same point in time. The summarized data follow.
| U.S. Treasury security | Time to maturity | Yield |
| A | 1 year | 12.6% |
| B | 10 years | 11.2 |
| C | 6 months | 13.0 |
| D | 20 years | 11.0 |
| E | 5 years | 11.4 |
- a. Draw the yield curve associated with these data.
- b. Describe the resulting yield curve in part a, and explain what it says about the direction of future interest rates under the expectations theory.
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Yield curve A firm wishing to evaluate interest rate behavior has gathered yield data on five U.S. Treasury securities, each having a different maturity and all measured at the same point in time. The summarized data follow
U.S. Treasury security  Time to maturity    Yield
A                        1 years        12.6%        Â
B                        10 years        11.2%      Â
C                       6 months       13.0 %      Â
D                       20 years         11.0%        Â
E                        5 year          11.4%     Â
a. Draw the yield curve associated with these data.
b. Describe the resulting yield curve in part a, and explain what it says about the direction of future interest rates under the expectations theory.
YIELD CURVES
Assume that yields on U.S. Treasury securities were as follows:
Term Rate
6 months 4.69%
1 year 5.492 years 5.663 years 5.71
4 years 5.89
5 years 6.05
10 years 6.12
20 years 6.64
30 years 6.76
Plot a yield curve based on these data.
What type of yield curve is shown?
Whatinformationdoesthisgraphtellyou?
Based on this yield curve, if you needed to borrow money for longer than 1 year,
would it make sense for you to borrow short term and renew the loan or borrow long term? Explain.
Assume that yields on U.S. Treasury securities were as follows:Term     Rate6 months    4.69%1 year      5.492 years    5.663 years   5.714 years    5.895 years    6.0510 years  6.1220 years 6.6430 years 6.76
Â
a. Plot a yield curve based on these data.b. What type of yield curve is shown?c. What information does this graph tell you?d. Based on this yield curve, if you needed to borrow money for longer than 1 year,would it make sense for you to borrow short term and renew the loan or borrow longterm? Explain.
Chapter 6 Solutions
Principles Of Managerial Finance, Student Value Edition (14th Edition)
Ch. 6.1 - Prob. 1FOPCh. 6.1 - Prob. 6.1RQCh. 6.1 - What is the term structure of interest rates, and...Ch. 6.1 - For a given class of similar-risk securities, what...Ch. 6.1 - Prob. 6.4RQCh. 6.1 - List and briefly describe the potential issuer-...Ch. 6.2 - Prob. 1FOECh. 6.2 - What are typical maturities, denominations, and...Ch. 6.2 - Differentiate between standard debt provisions and...Ch. 6.2 - How is the cost of bond financing typically...
Ch. 6.2 - Prob. 6.9RQCh. 6.2 - Prob. 6.10RQCh. 6.2 - Compare the basic characteristics of Eurobonds and...Ch. 6.3 - Why is it important for financial managers to...Ch. 6.3 - Prob. 6.13RQCh. 6.3 - Prob. 6.14RQCh. 6.3 - Prob. 6.15RQCh. 6.4 - Prob. 6.16RQCh. 6.4 - What relationship between the required return and...Ch. 6.4 - If the required return on a bond differs from its...Ch. 6.4 - As a risk-averse investor, would you prefer bonds...Ch. 6.4 - Prob. 6.20RQCh. 6 - Prob. 1ORCh. 6 - Learning Goals 5, 6 ST6- 1 Bond valuation Lahey...Ch. 6 - Prob. 6.2STPCh. 6 - Prob. 6.1WUECh. 6 - The yields for Treasuries with differing...Ch. 6 - The YTMs for Treasuries with differing maturities...Ch. 6 - Assume that the rate of inflation expected over...Ch. 6 - Calculate the risk premium for each of the...Ch. 6 - Prob. 6.6WUECh. 6 - Prob. 6.7WUECh. 6 - Assume a 5-year Treasury bond has a coupon rate of...Ch. 6 - Prob. 6.1PCh. 6 - Prob. 6.2PCh. 6 - Prob. 6.3PCh. 6 - Yield curve A firm wishing to evaluate interest...Ch. 6 - Prob. 6.5PCh. 6 - Prob. 6.6PCh. 6 - Term structure of interest rates The following...Ch. 6 - Prob. 6.8PCh. 6 - Prob. 6.9PCh. 6 - Bond interest payments before and after taxes...Ch. 6 - Prob. 6.11PCh. 6 - Prob. 6.12PCh. 6 - Prob. 6.13PCh. 6 - Prob. 6.14PCh. 6 - Prob. 6.16PCh. 6 - Prob. 6.20PCh. 6 - Prob. 6.21PCh. 6 - Prob. 6.23PCh. 6 - Bond valuation: Semiannual interest Find the value...Ch. 6 - Prob. 1SE
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- Determinant of Interest Rates The real risk-free rate of interest is 4%. Inflation is expected to be 2% this year and 4% during each of the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?arrow_forwardInterest Rate Sensitivity A bond trader purchased each of the following bonds at a yield to maturity of 8%. Immediately after she purchased the bonds, interest rates fell to 7%. What is the percentage change in the price of each bond after the decline in interest rates? Assume annual coupons and annual compounding. Fill in the following table:arrow_forward1. (Yield curve) If yields on Treasury securities were currently as follows: Term Yield 6 months 1.00% 1 year 1.70% 2 years 2.10% 3 years 2.40% 4 years 2.70% 5 years 2.90% 10 years 3.50% 15 years 3.90% 20 years 4.00% 30 years 4.10% a. Plot the yield curve.b. Explain this yield curve using the unbiased expectations theory and the liquidity preference theoryarrow_forward
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