The following yield data for a number of highest-quality corporate bonds existed at each of the three
Question:
The following yield data for a number of highest-quality corporate bonds existed at each of the three points in time noted.
a. On the same set of axes, draw the yield curve at each of the three given times.
b. Label each curve in part a with its general shape (downward-sloping, upward-sloping, flat).
c. Describe the general interest rate expectation existing at each of the three times.
d. Examine the data from 5 years ago. According to the expectations theory, what approximate return did investors expect a 5-year bond to pay as of today?
Yield Today Time to maturity (years) years ago 2 years a 9.1% 9.2 9.3 9.5 9.4 9.3 9.4 14.6% 12.8 12.2 10.9 10.7 10.5 10.5 9.3% 9.8 10.9 12.6 12.7 12.9 13.5 1S 2 30
Step by Step Answer:
a b and c Five years ago the yield curve was relatively flat reflecting expectations of stable inter...View the full answer
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
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.
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