FIN431 Chapter 10 - Essentials of Investments(BKM 7th Ed...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Essentials of Investments (BKM 7 th Ed.) Answers to Suggested Problems – Lecture 6 Chapter 10 : 3. The bond callable at 105 should sell at a lower price because the call provision is more valuable to the firm when the call price is lower. Because the call feature is more valuable to the firm (and more costly to investors), investors will require a higher yield to maturity, resulting in a lower price. 4. Lower. Interest rates have fallen since the bond was issued. Thus, the bond is selling at a premium and the price will decrease (toward par value) as the bond approaches maturity. 5. True. Under the Expectations Hypothesis, there are no risk premia built into bond prices. The only reason for an upward sloping yield curve is the expectation of increased short- term rates in the future. 8. If the yield curve is upward sloping, you cannot conclude that investors expect short-term interest rates to rise because the rising slope could either be due to expectations of future increases in rates or due to a liquidity premium. In fact, with a liquidity premium, the yield curve can be upward sloping even if future short-term rates are expected to remain flat or even decrease. 9. a) The bond pays $50 every 6 months Current price = $1052.42 Assuming that market interest rates remain at 4% per half year: the price 6 months from now = $1044.52 b) Rate of return = [1044.52 - 1052.42 + 50]/1052.42 = .04 or 4% per 6 months. Because the yield has not changed, the bond prices adjust such that the bond earns exactly the
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/29/2012 for the course BUSINESS 100 taught by Professor Allprofessor during the Spring '12 term at Virginia College.

Page1 / 4

FIN431 Chapter 10 - Essentials of Investments(BKM 7th Ed...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online