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Question;The following table summarizes prices of various;default-free zero-coupon bonds (expressed as a percentage of face value);Maturity;(years) 1 2 3 4 5;Price;(per $100 face value) $95.51 $91.05 $86.38 $81.65 $76.51;a.;Compute the yield to maturity for each bond.;b.;b. Plot;the zero-coupon yield curve (for the first five years).;c.;c. Is;the yield curve upward sloping, downward sloping, or flat?;Problem 8-4;Suppose the current zero-coupon yield curve for risk-free bonds is as;follows;Maturity (years) 1 2 3 4 5;YTM 5.00% 5.50% 5.75% 5.95% 6.05%;a. What is the price per $100;face value of a two-year, zero-coupon, risk-free bond?;b. What is the price per $100 face;value of a four-year, zero-coupon, risk-free bond?;d.;What is the risk-free interest rate for a;five-year maturity?;Problem 8-12;Consider the following bonds;Coupon Rate Maturity;Bond (annual payments) (years);A 0% 15;B 0% 10;C 4% 15;D 8% 10;a.;What is the percentage change in the price of;each bond if its yields to maturity falls from 6% to 5%?;b.;Which of the bonds A?D are most sensitive to a;1% drop in interest rates from 6% to 5% and;why? Which bond is least sensitive? Explain how you could determine this;without doing the calculations in part (a).;Problem 8-13;Suppose you purchase a 30-year, zero-coupon bond with a;yield to maturity of 6%. You hold the bond for five years before selling it.;a. If the;bond?s yield to maturity is 6% when you sell it, what is the internal rate of;return of your investment?;b. If the;bond?s yield to maturity is 7% when you sell it, what is the internal rate of;return of your investment?;c. If the;bond?s yield to maturity is 5% when you sell it, what is the internal rate of;return of your investment?;d. Even if a bond has no chance of default, is your investment;risk free if you plan to sell it before it matures? Explain.;Problem 8-22;Suppose you are given the following information about the;default-free, coupon-paying yield curve;Maturity;(years) 1 2 3 4 5;YTM 5.00% 5.50% 5.75% 5.95% 6.05%;a. Use;arbitrage to determine the yield to maturity of a two-year, zero-coupon bond.;Term: 1 2 3 4;Yield;to maturity on zero coupon 2.00% 4.00% 6.00% 6.00%;b.What is the zero-coupon yield curve for years 1 through 4?;Problem 8-26;HMK Enterprises would like to raise $10 million to invest in;capital expenditures. The company plans to issue five-year bonds with a face;value of $1000 and a coupon rate of 6.5% (annual payments). The following table;summarizes the yield to maturity for five-year (annual-pay) coupon corporate;bonds of various ratings;Maturity;(years) 1 2 3 4 5;YTM 5.00% 5.50% 5.75% 5.95% 6.05%;a. Assuming;the bonds will be rated AA, what will the price of the bonds be?;b. How much;total principal amount of these bonds must HMK issue to raise $10 million;today, assuming the bonds are AA rated? (Because HMK cannot issue a fraction of;a bond, assume that all fractions are rounded to the nearest whole number.);c. What;must the rating of the bonds be for them to sell at par?;d. Suppose;that when the bonds are issued, the price of each bond is $959.54. What is the;likely rating of the bonds? Are they junk bonds?

 

Paper#50986 | Written in 18-Jul-2015

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