The Waffle House has $25 million of risk-free debt outstanding. This debt has an annual coupon...

 

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The Waffle House has $25 million of risk-free debt outstanding. This debt has an annual coupon rate of 8% and matures in 2 years. Coupons are paid once per year. The current term structure is flat at 4% per year, compounded annually. a. What is the current market value of the firm's debt? (2 points) b. What is the duration of the firm's debt? (4 points) c. Suppose yields rise by 200 basis points (from 4% to 5%). Calculate the modified duration and use it to approximate the new market value of the firm's debt. (4 points) The Waffle House has $25 million of risk-free debt outstanding. This debt has an annual coupon rate of 8% and matures in 2 years. Coupons are paid once per year. The current term structure is flat at 4% per year, compounded annually. a. What is the current market value of the firm's debt? (2 points) b. What is the duration of the firm's debt? (4 points) c. Suppose yields rise by 200 basis points (from 4% to 5%). Calculate the modified duration and use it to approximate the new market value of the firm's debt. (4 points)

Answer rating: 100% (QA)

a To calculate the current market value of the firms debt we can use the present value formula for a ... View the full answer