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( 1 ) What happens to the bond s value in part d if inflation rises immediately after the bond is issued, causing r d
What happens to the bonds value in part d if inflation rises immediately after the bond is issued, causing
r
d
to be What is the bonds value if
r
d
increases to Would it be a premium or discount bond?
What would happen to the bonds value if inflation fell and
r
d
declined to To Would it be a premium or a discount bond?
What would happen to the value of the year bond over time if the required rate of return remained at If it remained at Hint: With a financial calculator, enter PMT IYR FV and N and then change N to see what happens to the PV as the bond approaches maturity.
What is the yield to maturity on a year, annual coupon, $ par value bond that sells for $ That sells for $ What does the fact that a bond sells at a discount or at a premium tell you about the relationship between
r
d
and the bonds coupon rate?
What are the total return, the current yield, and the capital gains yield for the discount bond? Assume the bond is held to maturity and the company does not default on the bond.
How does the equation for valuing a bond change if semiannual payments are made? Find the value of a year, semiannual payment, coupon bond if the nominal
r
d
Suppose a year, semiannual coupon bond with a par value of $ is currently selling for $ producing a nominal yield to maturity of However, the bond can be called after years for a price of $
What is the bonds nominal yield to call YTC
If you bought this bond, do you think you would be more likely to earn the YTM or the YTC Why?
Write a general expression for the yield on any debt security
r
d
and define these terms: real riskfree rate of interest r inflation premium IP default risk premium DRP liquidity premium LP and maturity risk premium MRP
Define the real riskfree rate r What security can be used as an estimate of r What is the nominal riskfree rate
r
RF
What securities can be used as estimates of
r
RF
Describe a way to estimate the inflation premium IP for a tyear bond.
What is a bond spread and how is it related to the default risk premium? How are bond ratings related to default risk? What factors affect a companys bond rating?
What is interest rate or price risk? Which bond has more interest rate risk: an annual payment year bond or a year bond? Why?
What is reinvestment rate risk? Which has more reinvestment rate risk: a year bond or a year bond?
How are interest rate risk and reinvestment rate risk related to the maturity risk premium?
What is the term structure of interest rates? What is a yield curve?
Briefly describe bankruptcy law. If a firm were to default on its bonds, would the company be liquidated immediately? Would the bondholders be assured of receiving all of their promised payments?
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