Calculate durations and modified durations for the 3% bonds in Table 3.2. You can follow the procedure
Question:
Calculate durations and modified durations for the 3% bonds in Table 3.2. You can follow the procedure set out in Table 3.4 for the 9% coupon bonds. Confirm that modified duration closely predicts the impact of a 1% change in interest rates on the bond prices.
TABLE 3.2
Cash Payments ($) Price ($) $939.98 1,300.10 Year 1 $30 90 Year 2. Coupon 3% 9% $30 90 Year 6 $30 90 Year 7 $1,030 1,090
Step by Step Answer:
Given data Input variables Coupon rate 03 Price 939...View the full answer
Principles of Corporate Finance
ISBN: 978-1259144387
12th edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
Students also viewed these Corporate Finance questions
-
Compute Macaulay and modified durations for the following bonds: a. A 5-year bond paying annual coupons of 4.432% and selling at par. b. An 8-year bond paying semiannual coupons with a coupon rate of...
-
Compute Macaulay and modified durations for the following bonds: a. A 5-year bond paying annual coupons of 4.432% and selling at par. b. An 8-year bond paying semiannual coupons with a coupon rate of...
-
Calculate the requested measures in parts (a) through (f) for bonds A and B (assume that each bond pays interest semiannually): (a) What is the price value of a basis point for bonds A and B? (b)...
-
Reflect on the key elements of an effective professional development program. List the top three elements that must be included in an effective professional development program. Does your school's...
-
The University of Wisconsin requires all of its students to pay, as part of their tuition, a student activity fee. Those fees are used to support campus clubs and activities. Some students who...
-
Find the sectional lift and moment coefficients taken about the midchord for the airfoil given in Problem 3.2 undergoing a simple harmonic motion \(h=\bar{h} e^{i \omega t}\). Problem 3.2 An airfoil...
-
Why do you think these questions were extremely difficult for Microsoft to answer as the company considered the development of the Windows XP version of Microsoft Windows as a potential capital...
-
Nature's Best Publishing Company pays its employees monthly. Payments made by the company on October 31, 2016, follow. Cumulative amounts paid to the persons named prior to October 31 are also given....
-
PROBLEM: LINETTI INC. started its construction of condominium in Tondo, Manila. The management of LINETTI INC. decided that the business purpose of constructing the condominium is to hold this...
-
On January 1 of Year One, Nupartner purchased a one-third interest in a partnership for $40,000. At the time of the purchase, the partnership had the following assets: Adjusted Base Fair Market Value...
-
A 10-year U.S. Treasury bond with a face value of $1,000 pays a coupon of 5.5% (2.75% of face value every six months). The reported yield to maturity is 5.2% (a six-month discount rate of 5.2/2 =...
-
Look again at Table 3.5. Suppose the spot interest rates change to the following downward-sloping term structure: r1 = 4.6%, r2 = 4.4%, r3 = 4.2% and r4 = 4.0%. Recalculate discount factors, bond...
-
Why is process visibility important for an effective lean system?
-
Logistics Solutions provides order fulfillment services for dot.com merchants. The company maintains warehouses that stock items carried by its dot.com clients. When a client receives an order from a...
-
Name 3 characteristics, actions, or behaviors of a "good" employee; describe or give an example of the behavior. Be specific. Next, name 3 characteristics, actions or behaviors of the "bad" employee;...
-
1 . Falcon Corporation operates a widget manufacturing firm in a small town in Ohio. Falcon s sells its products primarily in the states of Ohio, Indiana, Michigan and Pennsylvania, making up 8 0 %...
-
Describe one thing you learned about globalization (positive analysis, "what is"). How do you feel about globalization given what you read for today (normative analysis, "what should be")? How would...
-
Suppose list is an array of 6 components of the type int. What is stored in the array list after the following Java code executes? list[0] = 5; for (int i=1; 6; i++) { listi +5; if (i > 2) list[i] =...
-
The International Association for Accounting Education and Research states that: Professional ethics should pervade the teaching of accounting (www.iaaer.org). Discuss how this can be achieved on an...
-
What is the mode?
-
Suppose the current price of gold is $1,500 an ounce. Hotshot Consultants advises you that gold prices will increase at an average rate of 12% for the next two years. After that the growth rate will...
-
Calculate the year-by-year book and economic profitability for investment in polyzone production, as described in Chapter 11. Use the cash flows and competitive spreads shown in Table 11.2, and...
-
Here are alphas and betas for Intel and Conagra for the 60 months ending February 2012. Alpha is expressed as a percent per month. Alpha Beta Intel ................... 0.97 ........... 1.08 ConAgra...
-
Ruiz Company provides the following budgeted sales for the next four months. The company wants to end each month with ending finished goods inventory equal to 40% of next month??s budgeted unit sales...
-
Question 1 of 1 8.67/100 Lars Linken opened Monty Cleaners on March 1, 2020. During March, the following transactions were completed. Mar Owner invested $13,800 cash in the company. 1 1 Borrowed...
-
I needhelp please!! I dont know where I went wrong General information The I See The Light Company has a related company that produces the figurines. They use process costing in the molding...
Study smarter with the SolutionInn App