User Account

All Pages

How is interest-rate risk a function of a bond maturity

Assignment Help Finance Basics
Reference no: EM13285492

A quick look at bond quotes will tell you that GMAC has many different issues of bonds outstanding. Suppose that four of them have identical coupon rates of 7.25% but mature on four different dates. One matures in 2 years, one in 5 years, one in 10 years, and the last in 20 years. Assume that they all made coupon payments yesterday.

a. If the yield curve were flat and all four bonds had the same yield to maturity of 9%, what would be the fair price of each bond today?

b. Suppose that during the first hour of operation of the capital markets today, the term structure shifts and the yield to maturity of all these bonds changes to 10%. What is the fair price of each bond now.

c. Suppose that in the second hour of trading, the yield to maturity of all these bonds changes once more to 8%. Now what is the fair price of each bond?

d. Based on the price changes in response to the changes in yield to maturity, how is interest-rate risk a function of a bond's maturity? That is, is interest-rate risk the same for all four bonds, or does it depend on the bond's maturity?

 

Reference no: EM13285492

Questions Cloud

Midi-chlorian biology from this observation : Mid-chlorians have double-stranded DNA as their genetic material. DNA replication in these organisms is semi-conservative but differs from the process in terrestrial organisms in that there are no Okazaki fragments: synthesis is continuous on both th..
Explain what is the activation energy for this reaction : A first-order reaction has a half-life of 55.0 min at 25 ºC and 6.8 min at 100 ºC. What is the activation energy for this reaction
What is the speed of the ball in orbit : You have a ball on a wire that is twirled in a circular orbit with a radius of 3.8 m, and the centripetal force acting on the ball, What is the speed of the ball in orbit
Explain the total pressure of a mixture of n2o4 and no2 : The total pressure of a mixture of N2O4 and NO2 is 1.5 atm. If Kp=7.1 (at 25 degrees C) calculate the partial pressure of each gas in the mixture.
How is interest-rate risk a function of a bond maturity : Based on the price changes in response to the changes in yield to maturity, how is interest-rate risk a function of a bond's maturity? That is, is interest-rate risk the same for all four bonds, or does it depend on the bond's maturity?
How to plot the velocity and acceleration of the aircraft : Write a MATLAB program that asks the user to enter a beginning time and an ending time (both in seconds) that define an interval of time over which we want to plot the velocity and acceleration of the aircraft.
Compute carbon dioxide has a solubility : At 25 °C and 775 Torr, carbon dioxide has a solubility of 0.0347 M in water. What is its solubility at 25 °C and 1370 Torr
What is the wacc prior to the expansion : What is the WACC prior to the expansion? After the expansion? Why would leverage cause the increase in the cost of debt.
What is the weight of the landing craft : Imagine a landing craft approaching the surface of Callisto, one of Jupiter's moons. What is the weight of the landing craft in the vicinity of Callisto's surface

Reviews

Write a Review

Finance Basics Questions & Answers

  Global investments-mergers questions

Which of the two long-term financing securities (debt or equity) would potentially maximize shareholder earnings more?

  What is the expected return on the complete portfolio

You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. The standard deviation on the risky portfolio is 50%.

  What is the expected year-end dividend

ABC's stock has a required rate of return of 19.9%, and it sells for $62 per share. The dividend is expected to grow at a constant rate of 6.7% per year. What is the expected year-end dividend, D1?

  What is the total ordering cost

A. What is the EOQ? B. How many orders will be placed per year? C. What is the total carrying cost? D. What is the total ordering cost?

  Launching a global business effort

What advice would you offer an entrepreneur interested in launching a global business effort? Specifically address the following:

  Calculate the wacc below the re break point

The company's cost of retained earnings is 14% and the cost of external common equity is 16%. The corporate tax rate is 30%. Calculate the WACC below the RE break point.

  Expanding the existing business by acquiring a competitor

Currently, the riskless interest rate is 8%; the corporate tax rate is 50%; the current price of a share of common stock is $20; an the dividends have been level at $1 per share per year for many years. Recently, company executives have considered ex..

  Plot the marginal tax rates

Plot the marginal tax rates (measured on the y axis) against the pretax income levels (measured on the x axis). Explain the relationship between these variables.

  Reducing foreign exchange risk

What can a firm do to reduce foreign exchange risk? What are the differences between a forward contract, a futures contract, and options?

  What is the project''s discounted payback period

Roswell Energy Company is installing new equipment at a cost of $10 million. Expected cash flows from this project over the next five years will be $1,045,000, $2,550,000, $4,125,000, $6,326,750, and $7,000,000.

  What are the pre-tax profits from sales of course packs

Southwest U's campus book store sells course packs for $15 each, the variable cost per pack is $9, fixed costs to produce the packs are $200,000, and expected annual sales are 50,000 packs. What are the pre-tax profits from sales of course packs?

  Present value at different interest rates

Wainright Co. has identified an investment project with the following cash flows. What is the present value at 16 percent?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd