Recitation4_Chapter6_MB_fa11

# Recitation4_Chapter6_MB_fa11 - working with You can think...

This preview shows page 1. Sign up to view the full content.

Money and Banking (Fall 2011) Recitation #4 on Thursday (10/6) Chapter 6: Part 1: Questions 3 and 11 from chapter 6 will be used to guide the discussion on the risk structure of interest rates. Part 2: Suppose a firm issued a 10% coupon bond 20 years ago. The bond now has 5 years left until its maturity date and is currently selling at \$950. However, the firm is having financial difficulties. Investors believe that the firm will be able to make its remaining interest payments, but that at the maturity date, the firm will be forced into bankruptcy. As a result, bondholders expect to receive only 70% of the payments at the maturity date. a. Write out the equation for the “stated YTM,” which is the equation you have been
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: working with. You can think of this as the equation that will determine the official published YTM. b. Now write out the equation for the “expected YTM,” which is the equation that takes into account that investors actually expect to receive only 70% of the par value and coupon payment at maturity. c. Which YTM is higher? Why? d. Suppose instead that the YTM is fixed at the “stated YTM” from part a. What will happen to the price of the bond, given the risk of default of the final payment? Part 3: The following chart is the yield curve from October 2007. Based on the expectations hypothesis, what does the above yield curve tell you about short-term interest rates over the next 30 years?...
View Full Document

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern