Fundamentals of Corporate Finance (Special Edition for Rutgers Business School)
11th Edition
ISBN: 9781308509853
Author: Ross, Westerfield, Jordan
Publisher: McGraw Hill
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Textbook Question
Chapter 7, Problem 30QP
Finding the Maturity [LO2] You’ve just found a 10 percent coupon bond on the market that sells for par value. What is the maturity on this bond?
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Q1:
A 20-year bond has a coupon rate of 8 percent, and another bond of the same maturity has a coupon rate of 15 percent. If the bonds are alike in all other respects, which will have the greater relative market price decline if interest rates increase sharply? Why?
H5.
What is the payoff to the trading strategy if the stock price at expiration is equal to $0 (i.e., the stock price is zero)?
What is the payoff to the trading strategy if the stock price at expiration is equal to $50?
What portfolio of calls (maturity T, any strike) and/or bonds (Zero Coupon Bond paying $1 at time T) will give you the desired payoff?
Group of answer choices
Sell $30 zero-coupon bonds, buy a call option with a strike price of $20, sell two call options with a strike of $40, and sell a call option with a strike price of $80
Buy $30 zero-coupon bonds, sell two call option with a strike price of $30, buy 2 call options with a strike of $40, and sell a call with a strike price of $80
It is not possible to construct this payoff with only calls and bonds
Sell $50 zero-coupon bonds, buy two call with the strike price of $80, buy two calls with a strike price of $40, and sell a call with a strike of $20
Buy $30 zero-coupon bonds, sell a call option with a strike…
P2. Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 19 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?
Chapter 7 Solutions
Fundamentals of Corporate Finance (Special Edition for Rutgers Business School)
Ch. 7.1 - What are the cash flows associated with a bond?Ch. 7.1 - What is the general expression for the value of a...Ch. 7.1 - Is it true that the only risk associated with...Ch. 7.2 - Prob. 7.2ACQCh. 7.2 - Prob. 7.2BCQCh. 7.2 - Prob. 7.2CCQCh. 7.3 - What does a bond rating say about the risk of...Ch. 7.3 - What is a junk bond?Ch. 7.4 - Prob. 7.4ACQCh. 7.4 - What do you think would be the effect of a put...
Ch. 7.5 - Why do we say bond markets may have little or no...Ch. 7.5 - Prob. 7.5BCQCh. 7.5 - What is the difference between a bonds clean price...Ch. 7.6 - What is the difference between a nominal and a...Ch. 7.6 - What is the Fisher effect?Ch. 7.7 - What is the term structure of interest rates? What...Ch. 7.7 - What is the Treasury yield curve?Ch. 7.7 - What six components make up a bonds yield?Ch. 7 - Prob. 7.1CTFCh. 7 - The 10-year bonds issued by KP Enterprises were...Ch. 7 - Prob. 7.4CTFCh. 7 - Prob. 7.6CTFCh. 7 - The term structure of interest rates is based on...Ch. 7 - Treasury Bonds [LO1] Is it true that a U.S....Ch. 7 - Interest Rate Risk [LO2] Which has greater...Ch. 7 - Treasury Pricing [LO1] With regard to bid and ask...Ch. 7 - Prob. 4CRCTCh. 7 - Call Provisions [LO1] A company is contemplating a...Ch. 7 - Coupon Rate [LO1] How does a bond issuer decide on...Ch. 7 - Prob. 7CRCTCh. 7 - Prob. 8CRCTCh. 7 - Prob. 9CRCTCh. 7 - Term Structure [LO5] What is the difference...Ch. 7 - Crossover Bonds [LO3] Looking back at the...Ch. 7 - Municipal Bonds [LO1] Why is it that municipal...Ch. 7 - Bond Market [LO1] What are the implications for...Ch. 7 - Prob. 14CRCTCh. 7 - Bonds as Equity [LO1] The 100-year bonds we...Ch. 7 - Prob. 1QPCh. 7 - Interpreting Bond Yields [LO2] Suppose you buy a 7...Ch. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Coupon Rates [LO2] Essary Enterprises has bonds on...Ch. 7 - Bond Prices [LO2] Sqeekers Co. issued 15-year...Ch. 7 - Prob. 7QPCh. 7 - Coupon Rates [LO2] DMA Corporation has bonds on...Ch. 7 - Zero Coupon Bonds [LO2] You find a zero coupon...Ch. 7 - Valuing Bonds [LO2] Yan Yan Corp. has a 2,000 par...Ch. 7 - Valuing Bonds [LO2] Union Local School District...Ch. 7 - Calculating Real Rates of Return [LO4] If Treasury...Ch. 7 - Prob. 13QPCh. 7 - Prob. 14QPCh. 7 - Nominal versus Real Returns [LO4] Say you own an...Ch. 7 - Using Treasury Quotes [LO2] Locate the Treasury...Ch. 7 - Using Treasury Quotes [LO2] Locate the Treasury...Ch. 7 - Bond Price Movements [LO2] Bond X is a premium...Ch. 7 - Interest Rate Risk [LO2] Both Bond Sam and Bond...Ch. 7 - Interest Rate Risk [LO2] Bond J has a coupon rate...Ch. 7 - Prob. 21QPCh. 7 - Prob. 22QPCh. 7 - Accrued Interest [LO2] You purchase a bond with an...Ch. 7 - Prob. 24QPCh. 7 - Finding the Bond Maturity [LO2] Shinoda Corp. has...Ch. 7 - Prob. 26QPCh. 7 - Bond Prices versus Yields [LO2] a. What is the...Ch. 7 - Prob. 28QPCh. 7 - Zero Coupon Bonds [LO2] Suppose your company needs...Ch. 7 - Finding the Maturity [LO2] Youve just found a 10...Ch. 7 - Prob. 31QPCh. 7 - Components of Bond Returns [LO2] Bond P is a...Ch. 7 - Holding Period Yield [LO2] The YTM on a bond is...Ch. 7 - Valuing Bonds [LO2] Jallouk Corporation has two...Ch. 7 - Valuing the Call Feature [LO2] At one point,...Ch. 7 - Prob. 36QPCh. 7 - Real Cash Flows [LO4] When Marilyn Monroe died,...Ch. 7 - Prob. 38QPCh. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Prob. 7MCh. 7 - Prob. 8MCh. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Prob. 10M
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- H3. Please explain with details also explain wrong options A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT? a. The bond’s required rate of return is less than 7.5%. b. The bond has a current yield greater than 8%. c. The bond sells at a price below par. d.If the yield to maturity remains constant, the price of the bond will decline over time e. The bond sells at a discountarrow_forwardQUESTION 7 Consider the market for a bond which has a face value of $2,000, pays a coupon of $100, and matures in 1 year (that is, you will get the face value and one coupon payment next year). Suppose the demand for such bonds is given by P=4,000-2Q, and that the supply of such bonds is given by P=1,000+Q. What is the yield to maturity if one were to purchase the bond at the equilibrium price? 5% .05% 10% .10%arrow_forward12. Which of the following statements is most correct?a. If a bond’s yield to maturity exceeds its annual coupon, then thebond will be trading at a premium.b. If interest rates increase, the relative price change of a 10-yearcoupon bond will be greater than the relative price change of a 10-year zero coupon bond.c. If a coupon bond is selling at par, its current yield equals itsyield to maturity.d. Statements a and c are correct.e. None of the statements above is correct.arrow_forward
- 5. Suppose the yield to maturity on a one-year zero-coupon bond is 5%.The yield to maturity on a two-year zero-coupon bond is 3%.(a) According to the Expectations Hypothesis, what is the expected one-year rate inthe marketplace for year 2?(b) Consider an investor who is absolutely convinced that interest rates will notchange so that the yield on a one-year bond will still be 5% this time next year.Which of these two bonds, the one-year zero coupon bond, or the two-year zerocoupon bond, should this investor buy to maximize their one year return (undertheir strongly-held belief about future rates)?arrow_forwardQuestion 6 What would be the price (to the nearest $ of a $ 1,000 5-year bond with a coupon rate of 6%, if the required yield was 8%? A $900 B $920 C $904 D $1000arrow_forward5. A coupon bond has a $1000 face value and a 12% coupon rate. It is currently sold at 5940 and is expe cted to be sold at 5960 next year. What is the yield to maturity and the expected rate of capital gain? lf the inflation rate is 4%, what is the real interest rate on this bond? 6. Suppose the Fed is about to have a new chair who thinks the current rate of money growth is too fast. Discuss all the possible scenarios for what will happen to interest ratesarrow_forward
- Q30 If the price of the perpetual bond is OMR 375 with a coupon rate of 5%. What is the required rate of return of such bond (r), assume that the face of the bond is OMR 100? a. 1.33% b. 5.7% c. 7.5% d. 13.33%arrow_forward13. What is the value of a bond with a face value of £1,000 and a coupon rate of 8% if the required rate of return by investors is 15%? a. More than its face value. b. Less than its face value. c. £1,000. d. None of the above.arrow_forward3. Asea Brown Boveri (ABB Group) Bond has a coupon rate of 14%. Caterpillar Bond has a coupon rate of 6%. Both bonds have 20 years to maturity, a par value of $1,000 and a YTM of 10% and both make semiannual payments. If interest rates suddenly rise by 2%, what is the percentage change in the price of these bonds? Instead, if rates suddenly fall by 2%, what is the percentage change in the price of these bonds? As interest rates fall by 2%, which of the two bonds would you prefer to own. Explain briefly, why?arrow_forward
- 3. 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_forwardklp.3 What must be the price of a face-value $2,000 bond with a 6.4% coupon rate, annual coupons, and 20 years to maturity if YTM is 8.2% APRarrow_forward37 Which of the following observations is the most accurate? 37. a. If the required return on a bond with equivalent risk is 8%, a bond with a coupon rate of 10% may sell at a disadvantage if all other factors are identical.b. Assuming that the bond's yield to maturity stays stable over time, the price of a discount bond would rise.c. A bond's net return for a specified year is made up entirely of coupon interest payments.d. Both b and c are valid statements.e. All of the above claims are true.arrow_forward
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