FOUNDATIONS OF FINANCE- MYFINANCELAB
10th Edition
ISBN: 9780135160572
Author: KEOWN
Publisher: PEARSON
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Chapter 7, Problem 1MC
Summary Introduction
To determine: The
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Here are data on $1,000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley Assume you are thinking about buying these bonds Answer the following questions
a. Assuming interest is paid annually, calculate the values of the bonds if your required rates of return are as follows Microsoft, 7 percent, GE Capital, 15 percent, and Morgan Stanley 10 percent where 0
b. The bonds are selling for the following amounts
Microsoft
GE Capital
Morgan Stanley $850
$738
$561
What are the expected rates of return for each bond?
c. How would the value of the bonds change it (1) your required rate of notumn (r) increased 2 percentage points or (2) decreased 2 percentage points?
d. Explain the implications of your answers in part (c) in terms of interest rate nsk, premium bonds, and discount bonds
e. Should you buy the bonds? Explain
a. If your required rate of return on the Microsoft bond is 7 percent, what is the value of the bond?
(Round to the nearest cont)
Review
Coupon interest rate…
An insurance company is analyzing the following three bonds, each with five years to maturity, annual interest payments, and is using
duration as its measure of interest rate risk.
What is the duration of each of the three bonds? (Do not round intermediate calculations. Round your answers to 2 decimal places.
(e.g., 32.16))
a. $10,000 par value, coupon rate=9.7%, r 0.17
b. $10,000 par value, coupon rate 11.7%, r= 0.17
c. $10,000 par value, coupon rate = 13.7%, p=0.17
Duration of the bond
years
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall
Street Journal reports that 1-year T-bills are currently earning 1.50 percent. Your broker has determined the following information about
economic activity and Moore Corporation bonds:
Real risk-free rate = 0.50%
Default risk premium = 1.40%
Liquidity risk premium = 1.00%
Maturity risk premium = 2.00%
a. What is the inflation premium?
b. What is the fair interest rate on Moore Corporation 30-year bonds?
Note: Round your percentage answers to 2 decimal places (ie., 0.1234 should be entered as 12.34).
Expected inflation premium
Fair interest rate
Chapter 7 Solutions
FOUNDATIONS OF FINANCE- MYFINANCELAB
Ch. 7 - Prob. 1RQCh. 7 - Prob. 2RQCh. 7 - Prob. 3RQCh. 7 - a. How does a bonds par value differ from its...Ch. 7 - Prob. 5RQCh. 7 - Prob. 6RQCh. 7 - Prob. 7RQCh. 7 - Prob. 8RQCh. 7 - Prob. 9RQCh. 7 - Define the expected rate of return to bondholders.
Ch. 7 - (Bond valuation) Bellingham bonds have an annual...Ch. 7 - (Bond valuation) Flora Co.s bonds, maturing in 7...Ch. 7 - (Bond valuation) You own a 20-year, 1,000 par...Ch. 7 - (Bond valuation) Calculate the value of a bond...Ch. 7 - (Bond valuation) At the beginning of the year, you...Ch. 7 - Prob. 6SPCh. 7 - (Bond relationship) Mason, Inc. has two bond...Ch. 7 - Prob. 8SPCh. 7 - (Bond valuation) National Steels 15-year, 1,000...Ch. 7 - (Bond valuation) You own a bond that pays 70 in...Ch. 7 - Prob. 11SPCh. 7 - (Bond valuationzero coupon) The Latham Corporation...Ch. 7 - (Bond valuation) Bank of America has bonds that...Ch. 7 - Prob. 15SPCh. 7 - Prob. 16SPCh. 7 - Prob. 17SPCh. 7 - (Bondholders expected rate of return) You own a...Ch. 7 - (Expected rate of return and current yield) Time...Ch. 7 - (Expected rate of return and current yield)...Ch. 7 - Prob. 21SPCh. 7 - Prob. 22SPCh. 7 - (Current yield) Assume you have a bond with a...Ch. 7 - Prob. 24SPCh. 7 - (Expected rate of return) Assume you own a bond...Ch. 7 - Prob. 26SPCh. 7 - (Bondholders expected rate of return) You...Ch. 7 - Prob. 1MCCh. 7 - Assume that the bonds are selling for the...Ch. 7 - Prob. 3MCCh. 7 - Prob. 4MCCh. 7 - Prob. 5MC
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