Ask question

Ask question

All categories

4 years ago

15

Both Bond Sam and Bond Dave have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has six year

s to maturity, whereas Bond Dave has 19 years to maturity. a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave?

1 answer:

Pani-rosa [81]4 years ago

7 0

Answer:

assume Par Value = 1000

Price = 1000

Coupon = 7%

Coupon = Coupon rate * Par Value/2 = 7% * 1000/2 = 35

For Sam Maturity = 6 years

Price = summation Coupont/(1+YTM/2)2t + Par Value/(1+YTM/2)2t

1000 = 35/(1+YTM/2)2t + 1000/(1+YTM/2)2t

YTM = 7%

For Dave Maturity = 19 years

Price = Coupont/(1+YTM/2)2t + Par Value/(1+YTM/2)2t

1000 = 35/(1+YTM/2)2t + 1000/(1+YTM/2)2t

YTM = 7%

If YTM increases by 2% so new YTM =9%

For Sam Maturity = 6 years

Price = Coupont/(1+YTM/2)2t + Par Value/(1+YTM/2)2t

Price = 35/(1+(9%/2)2t + 1000/(1+9%/2)2t

Price = 908.81

Percentage change in price of Sam bond = 908.81 -1000/1000 = -9.12%

For Dave Maturity = 19 years

Price = Coupont/(1+YTM/2)2t + Par Value/(1+YTM/2)2t

Price = 35/(1+9%/2)2t + 1000/(1+9%/2)2t

Price = 819.50

Percentage change in price of Dave bond = (819.50-1000)/1000 = -18.05%

If YTM decreases by 2% so new YTM =5%

For Sam Maturity = 6 years

Price = Coupont/(1+YTM/2)2t + Par Value/(1+YTM/2)2t

Price = 35/(1+(5%/2)2t + 1000/(1+5%/2)2t

Price = 1102.58

Percentage change in price of Sam bond = (1102.58 -1000)/1000 = 10.26%

For Dave Maturity = 19 years

Price = Coupont/(1+YTM/2)2t + Par Value/(1+YTM/2)2t

Price = 35/(1+5%/2)2t + 1000/(1+5%/2)2t

Price = 1243.49

Percentage change in price of Dave bond = (1243.49-1000)/1000 = 24.35%

You might be interested in

Which statements are true (for a firm without non-operating income or expenses)? EBIT _____.

harkovskaia [24]

Answer: a. is the same as operating income

d. does not include interest payments

Explanation:

The earnings before interest and taxes(EBIT) is used to measure the profit of a firm which has to do with all the incomes and the expenses that the firm makes except the income tax and the interest expenses.

It should be noted that EBIT is not the same as the net sales as it involves operating costs. Also, EBIT is higher than the net income.

Therefore, options A and D are the right answer.

6 0

3 years ago

Commonwealth Construction (CC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of

xeze [42]

100%Equity
<span>---------------------------- </span>
<span>EBIT: $200,000 </span>
<span>Interest: $0 </span>
<span>Taxes: ($80,000) </span>
<span>EAT: $120,000 </span>
<span>Equity: $1,000,000 </span>
<span>ROE12.0% </span>

<span>50% Debt </span>
<span>-------------- </span>
<span>EBIT: $200,000 </span>
<span>Interest: ($40,000) </span>
<span>Taxes: ($64,000) </span>
<span>EAT: $96,000 </span>
<span>Equity: $500,000 </span>
<span>ROE: 19.2% </span>

<span>This is my thought and is contingent on interest expense being tax deductible to the corporation. </span>

<span>Under the equity scenario. Taxes are $80,000 or 40% of $200,000 which is 20% of the $1mm asset base. So the $120,000 earnings after tax divided by the $1mm base is 12% </span>

<span>With 50% leverage, you deduct $40,000 (8% of $500,000 financing) and taxes on remaining amount. The new equity base is smaller at $500,000 so the ROE is higher at 19.2%.</span>

4 0

4 years ago

Mark was recording accounting transactions when he came across a non-standard transaction type. However, based on his knowledge

vlada-n [284]

Answer:

The best answer to the question: This is an example of used a(n):___, would be, A: Conceptual framework to solve new problems.

Explanation:

A conceptual framework is a an analytical method, or technique, that is used in order for the person to be able to see the full picture, and the different variants and factors around it, in an organized manner. Applying this technique will allow a person to discover all the factor within an issue, visualize them and propose viable solutions to them. And this is what Mark did when he came by the non-standard transaction type. He still had to record the transaction, but the usual methods would not work for it. Therefore, Mark made use of his own knowledge and after viewing the problem through the conceptual framework technique, he was able to find a reasonable solution and thus filfill his job.

3 0

3 years ago

David manages a Shoney's restaurant. He is considering staying open later in the evening. For David, the variable costs associat

Arte-miy333 [17]

Answer:

Rent of the building will remain the same

Explanation:

The fixed costs will not change because fixed cost remains fixed for any level of activity whereas the variable cost changes with the increase in level of activity. As the activity level will change with additional hours work which will increase the variable costs only. So all variable costs will increase whereas fixed will remain fixed. The all the other options were variable costs except rent which is fixed cost. So rent will no change because of additional hours worked.

6 0

4 years ago

Expenses that are paid in advance are held on the balance sheet until the end of the accounting period when they are transferred

amm1812

Answer: False

Explanation: The expenses appear directly in the income statement and indirectly in the balance sheet.

It is useful to always read both the income statement and the balance sheet of a company, so that the full effect of an expense can be seen.

6 0

3 years ago