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Financial Planning Problems




Question;8-21. Consider a four-year, default-free;security with annual coupon payments and a face value of $1000 that is issued;at par. What is the coupon rate of this bond?;8-22. Consider a five-year;default-free bond with annual coupons of 5% and a face value of $1000.;a. Without doing any calculations, determine;whether this bond is trading at a premium or at a discount. Explain.;b. What is the yield to maturity on this bond?;c. If the yield to maturity on this bond;increased to 5.2%, what would the new price be?.;8-23. Prices of zero-coupon, default-free;securities with face values of $1000 are summarized in the following table;Suppose you observe that a;three-year, default-free security with an annual coupon rate of 10% and a face;value of $1000 has a price today of $1183.50. Is there an arbitrage;opportunity? If so, show specifically how you would take advantage of this;opportunity. If not, why not?;8-24. Assume there are four default-free bonds;with the following prices and future cash flows;Do these bonds present an;arbitrage opportunity? If so, how would you take advantage of this opportunity?;If not, why not?;8-25. Suppose;you are given the following information about the default-free, coupon-paying;yield curve;a. Use arbitrage to determine the yield to;maturity of a two-year, zero-coupon bond.;b. What is the zero-coupon yield curve for;years 1 through 4?;Less: one-year zero;($120 face value);(120);Less: two-year zero;($120 face value);?;(120);Less: three-year zero;($120 face value);?;?;(120);Four-year zero ($1120;face value);?;?;?;1,120.;8-26. Explain why the expected return of a;corporate bond does not equal its yield to maturity.;8-27. Grummon Corporation has issued;zero-coupon corporate bonds with a five-year maturity. Investors believe there;is a 20% chance that Grummon will default on these bonds. If Grummon does;default, investors expect to receive only 50 cents per dollar they are owed. If;investors require a 6% expected return on their investment in these bonds, what;will be the price and yield to maturity on these bonds?;8-28. The following table summarizes the yields;to maturity on several one-year, zero-coupon securities;a. What is the price (expressed as a;percentage of the face value) of a one-year, zero-coupon corporate bond with a;AAA rating?;b. What is the credit spread on AAA-rated;corporate bonds?;c. What is the credit spread on B-rated;corporate bonds?;d. How does the credit spread change with the;bond rating? Why?.;8-29. Andrew Industries is contemplating;issuing a 30-year bond with a coupon rate of 7% (annual coupon payments) and a;face value of $1000. Andrew believes it can get a rating of A from Standard and;Poor?s. However, due to recent financial difficulties at the company, Standard;and Poor?s is warning that it may downgrade Andrew Industries bonds to BBB.;Yields on A-rated, long-term bonds are currently 6.5%, and yields on BBB-rated;bonds are 6.9%.;a. What is the price of the bond if Andrew;maintains the A rating for the bond issue?;b. What will the price of the bond be if it is;downgraded?;8-30. 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 (annualpay) coupon corporate bonds of various;ratings;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?.;8-31. A BBB-rated corporate bond has a yield to;maturity of 8.2%. A U.S.;Treasury security has a yield to maturity of 6.5%. These yields are quoted as;APRs with semiannual compounding. Both bonds pay semiannual coupons at a rate;of 7% and have five years to maturity.;a. What is the price (expressed as a;percentage of the face value) of the Treasury bond?;b. What is the price (expressed as a;percentage of the face value) of the BBB-rated corporate bond?;c. What is the credit spread on the BBB bonds?


Paper#50993 | Written in 18-Jul-2015

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