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ahrayia [7]
3 years ago
12

Masters Corp. issues two bonds with 20-year maturities. Both bonds are callable at $1,050. The first bond is issued at a deep di

scount with a coupon rate of 4% and a price of $580 to yield 8.4%. The second bond is issued at par value with a coupon rate of 8.75%.
a. What is the yield to maturity of the par bond? Why is it higher than the yield of the discount bond?
b. If you expect rates to fall substantially in the next two years, which bond has the higher expected rate of return?
c. In what sense does the discount bond offer "implicit call protection"?
Business
1 answer:
I am Lyosha [343]3 years ago
3 0

Answer:

Explanation:

a)

The YTM of the bond at par value is equals to its coupon rate, 8.75%. Other things being equal, this 4% coupon rate bond will be more eye-catching as the coupon rate is lower than the current market yields, and its price is far below the call price. So, if yields drop, capital gains on the bond will not be restricted by the call price.

b)

If an investor foresees that yields will fall considerably, the 4% bond proposes a better expected return.

c)

Implicit call protection is offered in the sense that any likely fall in yields would not be nearly enough to make the firm consider calling the bond. In this sense, the call feature is almost irrelevant

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The correct answer is (e)

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At a price of _____, books will be both supplied and demanded. $10 $20 $30
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Suppose that you are an economic-policy advisor. Environmental groups are pressuring you to implement the highest-possible carbo
liraira [26]

Answer: a tax equal to the external cost.

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3 0
2 years ago
Treasury bills are currently paying 7 percent and the inflation rate is 3.2 percent. a. What is the approximate real rate of int
FromTheMoon [43]

Answer:

The real risk free rate is 3.8%

The exact risk-free rate is 3.68%

Explanation:

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nominal risk-free rate = real risk-free rate+inflation rate

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real risk-free rate=3.8%

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real risk-free rate=(nominal rate+1)/(inflation rate+1)-1

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