$(1)$

What happens to the bond$$s value in part d if inflation rises immediately after the bond is issued, causing

r

d

to be $13\%?$ What is the bond$$s value if

r

d

increases to $15\%?$ Would it be a premium or discount bond?

$(2)$

What would happen to the bond$$s value if inflation fell and

r

d

declined to $7\%?$ To $5\%?$ Would it be a premium or a discount bond?

$(3)$

What would happen to the value of the $10-$year bond over time if the required rate of return remained at $15\%?$ If it remained at $5\%?($Hint: With a financial calculator, enter PMT$,$ I$/$YR$,$ FV$,$ and N$,$ and then change N to see what happens to the PV as the bond approaches maturity.$)$

$(1)$

What is the yield to maturity on a $10-$year, $9\%$ annual coupon, $$1,000$ par value bond that sells for $$887\mathrm{.}00?$ That sells for $$1,134\mathrm{.}20?$ 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 bond$$s coupon rate?

$(2)$

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 $10-$year, semiannual payment, $10\%$ coupon bond if the nominal

r

d

$=$

$13$

$\%$

$.$

Suppose a $10-$year, $10\%$ semiannual coupon bond with a par value of $$1,000$ is currently selling for $$1,135\mathrm{.}90,$ producing a nominal yield to maturity of $8\%.$ However, the bond can be called after $5$ years for a price of $$1,050.$

$(1)$

What is the bond$$s nominal yield to call $($YTC$)?$

$(2)$

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 risk$-$free rate of interest $($r$*),$ inflation premium $($IP$),$ default risk premium $($DRP$),$ liquidity premium $($LP$),$ and maturity risk premium $($MRP$).$

Define the real risk$-$free rate $($r$*).$ What security can be used as an estimate of r$*?$ What is the nominal risk$-$free rate

$($

r

RF

$)$

$?$ What securities can be used as estimates of

r

RF

$?$

Describe a way to estimate the inflation premium $($IP$)$ for a t$-$year 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 company$$s bond rating?

What is interest rate $($or price$)$ risk? Which bond has more interest rate risk: an annual payment $1-$year bond or a $10-$year bond? Why?

What is reinvestment rate risk? Which has more reinvestment rate risk: a $1-$year bond or a $10-$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?