solve07 - FNCE 3010 (Durham) HW 7 (bonds) 1. Is it true...

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FNCE 3010 (Durham) HW 7 (bonds) 1. Is it true that a U.S. Treasury security is risk-free? Solution: No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury securities have substantial interest rate risk. (But, they are free of default risk ) 2. Which has greater interest rate risk, a 30-year Treasury bond or a 30-year BB rated corporate bond? Solution: All else the same, the Treasury security will have lower coupons because of its lower default risk (and thus longer duration), so it will have greater duration and thus interest rate risk. (The corporate bond has greater default risk). 3. A company is contemplating a long-term bond issue. It is debating whether or not to include a call provision. What are the benefits to the company from including a call provision? What are the costs? How do these answers change for a put provision? Solution: There are two benefits to a call provision. First, the company can take advan- tage of interest rate declines by calling in an issue and replacing it with a lower
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solve07 - FNCE 3010 (Durham) HW 7 (bonds) 1. Is it true...

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