Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Effect of Yield to maturity on bond price Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 40-year

Effect of Yield to maturity on bond price

Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 40-year life when issued and the annual interest payment was then 12 percent. This return was in line with the required returns by bondholders at that point in time as described next:

Real rate of return............ 2%

Inflation premium............ 5

Risk premium................... 5

Total return.................. 12%

Assume that 10 years later, due to good publicity, the risk premium is now 2 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 30 years remaining until maturity. Compute the new price of the bond.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Production And Operations Analytics

Authors: Steven Nahmias, Tava Lennon Olsen

8th Edition

1478639261, 9781478639268

More Books

Students also viewed these Finance questions

Question

Define strategic and operational planning.

Answered: 1 week ago