Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 4, Problem 15P
Summary Introduction
To determine: The best estimate of the nominal interest rate
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Absalom Energy's 8% coupon rate, semiannual payment, $1,000 par value bonds that mature in 20
years are callable 6 years from now at a price of $1,025. The bonds sell at a price of $1,255.60, and
the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their
current level, what is the best estimate of the nominal interest rate on new bonds issued in 6 years?
Do not round intermediate calculations. Round your answer to two decimal places.
%
You Answered
orrect Answer
A company is promising a coupon payment of $46 in 2.03 years.
A risk free government bond of the same maturity is yielding
1.66% per year. The credit spread for the promised payment by
the company is 1.24% per year. Both the yield and the spread
are stated on a continuously compounded basis.
What is the present value of the expected loss on the promised
payment?
1.11 margin of error +/-50
Suppose that yield rates on zero coupon bonds are currently 26 for a one-year maturity, 3% for a two-year
maturity and 4.% for a three-year maturity (all effective annual rates).
Suppose that someone is willing to borrow money from you starting one year from now to be repaid three
years from now at an effective annual interest rate of 6.5146438635186%. Construct a transaction in which an
arbitrage gain can be obtained. What is your positive net gain for net investment of 0? (net cashflow at t-3)
01345
One possible correct answer is: 0.030250290387703
Chapter 4 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 4 - Short-term interest rates are more volatile than...Ch. 4 - The rate of return on a bond held to its maturity...Ch. 4 - If you buy a callable bond and interest rates...Ch. 4 - A sinking fund can be set up in one of two ways....Ch. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Current Yield for Annual Payments Heath Food...Ch. 4 - Determinant of Interest Rates
The real risk-free...Ch. 4 - Default Risk Premium A Treasury bond that matures...Ch. 4 - Prob. 6P
Ch. 4 - Bond Valuation with Semiannual Payments
Renfro...Ch. 4 - Prob. 8PCh. 4 - Bond Valuation and Interest Rate Risk The Garraty...Ch. 4 - Prob. 10PCh. 4 - Prob. 11PCh. 4 - Bond Yields and Rates of Return A 10-year, 12%...Ch. 4 - Yield to Maturity and Current Yield You just...Ch. 4 - Current Yield with Semiannual Payments
A bond that...Ch. 4 - Prob. 15PCh. 4 - Interest Rate Sensitivity
A bond trader purchased...Ch. 4 - Bond Value as Maturity Approaches An investor has...Ch. 4 - Prob. 18PCh. 4 - Prob. 19PCh. 4 - Prob. 20PCh. 4 - Bond Valuation and Changes in Maturity and...Ch. 4 - Yield to Maturity and Yield to Call
Arnot...Ch. 4 - Prob. 23PCh. 4 - Prob. 1MCCh. 4 - Prob. 2MCCh. 4 - How does one determine the value of any asset...Ch. 4 - Prob. 4MCCh. 4 - What would be the value of the bond described in...Ch. 4 - Suppose a 10-year, 10% semiannual coupon bond with...Ch. 4 - Prob. 9MCCh. 4 - Prob. 10MCCh. 4 - Prob. 11MCCh. 4 - Prob. 12MCCh. 4 - Prob. 14MCCh. 4 - Prob. 15MCCh. 4 - Prob. 16MCCh. 4 - Prob. 17MC
Knowledge Booster
Similar questions
- Absalom Energy’s 14% coupon rate, semiannual payment, $1,000 par valuebonds that mature in 30 years are callable 5 years from now at a price of$1,050. The bonds sell at a price of $1,353.54, and the yield curve is flat.Assuming that interest rates in the economy are expected to remain at theircurrent level, what is the best estimate of the nominal interest rate on newbonds issued in 5 years?arrow_forwardGiven the indicated maturities listed in the following table, assume the following yields for US Treasury securities: INTEREST RATE (Percent) On the following graph, plot the yield curve implied by these interest rates. Place a blue point (circle symbol) at each maturity and interest rate in the table, and the yield curve will draw itself. 1 0 Maturity (Years) 1 Yield (%) 10 9 8 0 5 5 10 20 30 3.6 5.5 5.5 4.2 4.0 10 15 20 MATURITY (Years) 25 30 Yield Curvearrow_forwardDerive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with an 8% coupon if it is currently selling at par and the probability distribution of its yield to maturity a year from now is as follows: State of the Economy Boom Normal growth Recession Probability 0.20 0.50 0.30 YTM 11.0% 8.0 7.0 For simplicity, assume the entire 8% coupon is paid at the end of the year rather than every 6 months.arrow_forward
- Draw the yield curve described as follows: • Interest rates: 2% in year 1; 2.5% in year 2; 3% in year 3; 4.5% in year 4. • Term premiums: 0.75% for a one-year bond, rising by 0.25% for each additional year of maturity. What does this yield curve suggest is the predominant short to medium-term economic outlook among market participants?arrow_forwardComplete problem: Yield to Maturity for Annual Payments XYZ Corporation' s bonds have 14 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $950. What is their yield to maturity? Show your work.arrow_forwardYIELD CURVES Suppose the inflation rate is expected to be 7% next year, 5% the following year, and 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1 year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5 year or longer term T-bonds. a. Calculate the interest rate 1-,2-,3-,4-,5-,10- and 20-year Treasury Securities and plot the yield curve. b. Suppose a AAA-rated company (which is the highest bond rating a firm can have) had bonds with the same maturities as the Treasury bonds. Estimate and plot what you believe a AAA-rated company’s yield curve would look like on the same graph with the treasury bond yield curve. (Hint: think about the default risk premium on its long term versus in short-term bonds) c. On the same graph, plot the approximate yield curve of…arrow_forward
- Absalom Energy’s 9% coupon rate, semiannual payment, $1,000 par value bonds that mature in 10 years are callable 9 years from now at a price of $1,100. The bonds sell at a price of $1,520.30, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of the nominal interest rate on new bonds issued in 9 years? Do not round intermediate calculations. Round yourarrow_forwardFinance Suppose that 6-month, 12-month, 18-month, and 24-month zero rates continuously compounded are 0.01, 0.02,0.01,and 0.01 per annum, respectively. Estimate the cash price of a bond with a face value of $1000 that will mature in 24 months pays a coupon of $81 per annum semiannually. Please write down the numerical answer with two decimal points and no dollar sign.arrow_forwardLloyd Corporation’s 14 percent coupon rate, semiannual payment, $1,000 par value bonds, which mature in 30 years, are callable 5 years from today at $1,050. The bonds sell at a price of $1,353 54, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of Lloyd’s nominal interest rate on new bonds?arrow_forward
- Treasury spot rates are as follows in today's market: Maturity (years) 1 2 3 Spot rate 2.1% 2.7% 3.3% One year ago, a 3-year Treasury note ($1,000 face value, 4% coupon rate and pays annual coupon) was issued and today it has two years left to maturity and two cashflows left to pay. Part 1 If this security is fairly priced in today's market, what must be true about the YTM? Check all that apply: 3.3% > YTM > 2.7% YTM > 3.3% Being the complex average of 1-yr and 2-yr Treasury spot rates, YTM is quite close to 2-yr spot rate but quite far from 1-yr spot rate YTM < 2.1% Being the complex average of 1-yr and 2-yr Treasury spot rates, YTM is quite close to 1-yr spot rate but quite far from 2-yr spot rate 2.7% > YTM > 2.1% Part 2 If this security is under-priced but greater than $1,000 in today's market, what can you conclude about the YTM? Check all that apply: YTM < 4% 3.3% > YTM > 2.7% YTM must be greater than that computed in…arrow_forwardPart B Today, three years later, yields on US Treasuries are as shown below. Treasury Yield (%/year) And Thrumbauer's improved financial performance has resulted in its credit rating improving to A. (i) Should its risk premium today be: Choose one and expalin your answer. (ii) Using the risk premium selected above, what would be the interest (yield) on Thrombauer's bond today? (iii) What would be the price of the bond today? (iv) What would be your return (%/year) if you sold the bond at this price? 1 4.10% 2.85% Years to Maturity 2 4.30% 3.25% 3 4.39% 3.65% 5 4.50% 8 4.65%arrow_forwardSubject:- Finance Currently, the term structure is as follows: One-year bonds yield 9%, two-year bonds yield 10%, three-year bonds and greater maturity bonds all yield 11%. You are choosing between one-, two-, and three-year maturity bonds all paying annual coupons of 10%, once a year. Which bond should you buy if you strongly believe that at year-end the yield curve will be flat at 11%?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT