Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9
Question:
Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 14 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?
CouponA coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
Step by Step Answer:
Initially at a YTM of 6 percent the prices of the two bonds are P J 15PVIFA 328 100...View the full answer
Fundamentals of Corporate Finance
ISBN: 978-1260153590
12th edition
Authors: Stephen M. Ross, Randolph W Westerfield, Robert R. Dockson, Bradford D Jordan
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 Business questions
-
Workman Software has 6.4 percent coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 94.31 percent of par. What is the current yield on the...
-
Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds with a par value of $1,000 each to raise the money. The...
-
The next dividend payment by Savitz, Inc., will be $2.34 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $37 per share,...
-
A 200 g mass attached to a horizontal spring oscillates at a frequency of 1.5 Hz. At one instant, the mass is at x = 70 mm and has vx = -0.2 m/s. Determine (a) The period (b) The amplitude (c) The...
-
Let h: Rn Rm be a homomorphism. (a) Show that the image under h of a line in Rn is a (possibly degenerate) line in Rm. (b) What happens to a k-dimensional linear surface?
-
Problems 107116 are based on material learned earlier in the course. The purpose of these problems is to keep the material fresh in your mind so that you are better prepared for the final exam. Find...
-
Assuming the same data as given in problem 9, was the well in each case profitable? Discuss your answer. Problem 9:- Property cost (acquisition cost). Drilling cost (one well). Estimated completion...
-
The major classifications of activities reported in the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed below as: 1. Operating activityadd to...
-
Define the general - purpose financial statements and points out the limitation of such statements.
-
After six months of study, much political arm wrestling, and some serious financial analysis, Dr. Martin Starr, president of Southwestern University, had reached a decision. To the delight of its...
-
Both Bond Sam and Bond Dave have 7.3 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has three years to maturity, whereas Bond Dave has 20 years to maturity. If...
-
Chamberlain Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 6 percent coupon bonds on the market that sell for $1,083, make semiannual...
-
Movie companies need to predict the gross receipts of individual movies once a movie has debuted. The following results, stored in PotterMovies , are the first weekend gross, the U.S. gross, and the...
-
It is important for companies to recognize that if they are going to make or receive payment in a foreign currency, they are carrying the foreign exchange risk. What is a foreign exchange risk?
-
For each class of financial assets and liabilities, the entity shall disclose the fair value of that class of financial assets and liabilities in a manner that allows comparison with the...
-
Under the units-of-production depreciation method, what is the depreciation cost per unit if the cost of the asset is $9,900, the residual value is $1,000, the expected usage of the asset is 8,900...
-
Compare the Product differentiation for: Harry Rosen, Moore's clothing, Tip Top tailors, RW& Co, Suit supply, Ted baker and Harry & David.
-
How do state ELL proficiency tests like the WIDA guide data-informed decision making? Explain how do these test results affect lesson planning?
-
Go to the IMF website at www.imf.org and find the World Economic Outlook database; then download data on the current account balance (as a percent of GDP) for Greece, Spain, Portugal, Italy, and...
-
Using thermodynamic data from Appendix 4, calculate G at 258C for the process: 2SO 2 (g) + O 2 (g) 88n 2SO 3 (g) where all gases are at 1.00 atm pressure. Also calculate DG8 at 258C for this same...
-
Coupon Rates Hawk Enterprises has bonds on the market making annual payments, with 16 years to maturity, and selling for $870. At this price, the bonds yield 7.5 percent. What must the V coupon rate...
-
Bond Prices Cutler Co. issued 11-year bonds a year ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If the YTM on these bonds is 8.6 percent, what is the current bond price?
-
Bond Yields Ngata Corp. issued 12-year bonds 2 years ago at a coupon rate of 9.2 percent. The bonds make semiannual payments. If these bonds currently sell for 104 percent of par value, what is the...
-
Regarding the following structure answer the following questions: N 1) What is the sar? wwww olaparib (lynparza) 2)What is the quantitive estimation (principle of assay)?
-
7. Determine the Q-values of the following reaction: N+13N P+13C (Given: Rest-mass of 13N = 13.005739 u; rest-mass of 13C = 13.003355 u.) (3 marks)
-
Consider the following description for the element iron, Fe Ph Iron is a silver-white malleable ductile magnetic heavy metallic element that readily rusts in moist air to give a hydrated iron oxide....
Study smarter with the SolutionInn App