Finance problems

Question # 00005257 Posted By: neil2103 Updated on: 12/13/2013 11:41 AM Due on: 12/30/2013
Subject Finance Topic Finance Tutorials:
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The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value):

Maturity (years) 1 2 3 4 5

Price (per $100 face value) $95.51 $91.05 $86.38 $81.65 $76.51

a. Compute the yield to maturity for each bond.

b. b. Plot the zero-coupon yield curve (for the first five years).

c. c. Is the yield curve upward sloping, downward sloping, or flat?

Problem 8-4

Suppose the current zero-coupon yield curve for risk-free bonds is as follows:

Maturity (years) 1 2 3 4 5

YTM 5.00% 5.50% 5.75% 5.95% 6.05%

a. What is the price per $100 face value of a two-year, zero-coupon, risk-free bond?

b. What is the price per $100 face value of a four-year, zero-coupon, risk-free bond?

d. What is the risk-free interest rate for a five-year maturity?

Problem 8-12

Consider the following bonds:

Coupon Rate Maturity

Bond (annual payments) (years)

A 0% 15

B 0% 10

C 4% 15

D 8% 10

a. What is the percentage change in the price of each bond if its yields to maturity falls from 6% to 5%?

b. Which of the bonds A–D are most sensitive to a 1% drop in interest rates from 6% to 5% and why? Which bond is least sensitive? Explain how you could determine this without doing the calculations in part (a).

Problem 8-13

Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 6%. You hold the bond for five years before selling it.

a. If the bond’s yield to maturity is 6% when you sell it, what is the internal rate of return of your investment?

b. If the bond’s yield to maturity is 7% when you sell it, what is the internal rate of return of your investment?

c. If the bond’s yield to maturity is 5% when you sell it, what is the internal rate of return of your investment?

d. Even if a bond has no chance of default, is your investment risk free if you plan to sell it before it matures? Explain.

Problem 8-22

Suppose you are given the following information about the default-free, coupon-paying yield curve:

Maturity (years) 1 2 3 4 5

YTM 5.00% 5.50% 5.75% 5.95% 6.05%

a. Use arbitrage to determine the yield to maturity of a two-year, zero-coupon bond.

Term: 1 2 3 4

Yield to maturity on zero coupon 2.00% 4.00% 6.00% 6.00%

b.What is the zero-coupon yield curve for years 1 through 4?

Problem 8-26

HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1000 and a coupon rate of 6.5% (annual payments). The following table summarizes the yield to maturity for five-year (annual-pay) coupon corporate bonds of various ratings:

Maturity (years) 1 2 3 4 5

YTM 5.00% 5.50% 5.75% 5.95% 6.05%

a. Assuming the bonds will be rated AA, what will the price of the bonds be?

b. How much total principal amount of these bonds must HMK issue to raise $10 million today, assuming the bonds are AA rated? (Because HMK cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number.)

c. What must the rating of the bonds be for them to sell at par?

d. Suppose that when the bonds are issued, the price of each bond is $959.54. What is the likely rating of the bonds? Are they junk bonds?

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Tutorials for this Question
  1. Tutorial # 00005060 Posted By: neil2103 Posted on: 12/13/2013 11:42 AM
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    The solution of Finance problems...
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