1. Whatisdefaultrisk? 2. A bond trades at above its face value of $1,000 and has a...

1. Whatisdefaultrisk?

2. A bond trades at above its face value of $1,000 and has a yield to maturity below the coupon rate. What would the yield to maturityonthisbondhavetobeforthebondtotradeatpar?

3. AssumenowthatBoeingisviewedasariskierfirm,andthatits rating drops. What will happen to the return required by bondholdersofBoeing?Whatistheimpactonthebondprice

Expert Solution

Part 1:
Default risk is the chance that the bond issuer will not make the required coupon payments or principal repayment to its bondholders
When a bond issuer is unable to pay the coupon or principal payment to the bondholders, then it is known as default risk. Normally business will lower credit rating carry default risk. The companies that are unable to generate enough capital from their business are unable to pay off the coupon payment and the principal repayment.

Part 2:
For a bond to sell at par, the yield to maturity should be equal to the coupon rate.

Part 3:
If the rating drops, the investors will demand for higher yield. So, credit rating and the yield to maturity are inversely related. So, if credit rating drops, the yield will increase.
If yield increases then the bond price will decrease, because the yield to maturity is used to discount the future cash flows of a bond to calculate its price.

jeff jeffy answered 7 months ago

1.A bond currently trades at $1,045.00 and has a face value of $1,000. If the annual...

1.A bond currently trades at $1,045.00 and has a face value of $1,000. If the annual yield is 6% and the bond has 19 years to maturity, what is its coupon rate? 2. A bond maturing in 7 years at a par value of $1,000 has a coupon rate of 6% and current yield of 7%. What is the price of the bond?

A 5 year semiannual coupon bond with a face value of $1,000 trades at $938. The...

A 5 year semiannual coupon bond with a face value of $1,000 trades at $938. The market-determined discount rate is 9%. What is the coupon rate? Answer in percent and round to two decimal places.

1. A bond with 10 years to maturity has a face value of $1,000. The bond...

1. A bond with 10 years to maturity has a face value of $1,000. The bond can be called in four years for $1050. The bond pays an 6 percent semiannual coupon, and the bond has a 3.3 percent nominal yield to maturity. What is the price of the bond today assuming that it will be called? 2. A corporate bond that matures in 12 years pays a 9 percent annual coupon, has a face value of $1,000, and a current...

2. Bond Valuation: You are analyzing a bond. The bond has a $1,000 face value, matures...

2. Bond Valuation: You are analyzing a bond. The bond has a $1,000 face value, matures in 10 years, and pays a 6.0% annual interest coupon payment. The bond pays interest semi-annually. a. What is the amount of interest (in dollars) you can expect to receive from this bond every six months? b. How many semiannual interest payments will you receive? c. If the bond sells for $1,025.00, what is the bond’s current yield to maturity (YTM)? Write your inputs...

7. Bond 1 and Bond 2 both have a face value of $1,000. Bond 1 pays...

7. Bond 1 and Bond 2 both have a face value of $1,000. Bond 1 pays a 5% coupon (annual payments) while Bond 2 is a zero coupon bond. On November 30, 2014 (immediately after the annual coupon payment), Bond 1 had exactly 20 years to maturity, while Bond 2 had 15 years to maturity. The yield to maturity for each bond was 10% on November 30, 2014, and was 8% on November 30, 2015. A. What was the price...

1. Calculate the price of a bond with Face value of bond is $1,000 and: a....

1. Calculate the price of a bond with Face value of bond is $1,000 and: a. Bond yield of 8.4%, coupon rate of 7% and time to maturity is 5 years. Coupon is paid semi-annually (Bond 1) b. Bond yield of 7%, coupon rate of 8% and time to maturity is 4 years. Coupon is paid semi-annually c. Calculate the price of Bond 1 right after the 5th coupon payment. 2. Arcarde Ltd issues both ordinary shares and preference shares...

Bond Valuation A corporate bond has a face value of $1,000. The bond has an 8%...

Bond Valuation A corporate bond has a face value of $1,000. The bond has an 8% coupon rate and it has 13 years to maturity. The interest rate on similar bonds is 6%. Assume interest is paid annually. What is the current price of this bond? Assume everything in #1 above, except the interest rate on similar bonds is 4%. What is the current price of this bond? Assume everything in #1 above, except the interest rate on similar bonds...

A $1,000 face value bond has a yield to maturity of 12.72%. The bond has a...

A $1,000 face value bond has a yield to maturity of 12.72%. The bond has a coupon rate of 13% and pays semiannual coupons/ The bond matures in 7 years. What is the price of the bond?

A bond with face value = 5,000 currently trades at par. Its Macaulay duration is 3.42...

A bond with face value = 5,000 currently trades at par. Its Macaulay duration is 3.42 years and its convexity is 68.47. Suppose yield currently is 3.95%, and is expected to change to 5.54%. Calculate the approximate dollar change in price using both duration and convexity. Assume annual compounding. Round your answer to 2 decimal places.

A bond with face value = 6,000 currently trades at par. Its Macaulay duration is 4.91...

A bond with face value = 6,000 currently trades at par. Its Macaulay duration is 4.91 years and its convexity is 63.98. Suppose yield currently is 2.32%, and is expected to change to 3.65%. Calculate the approximate dollar change in price using both duration and convexity. Assume annual compounding. Round your answer to 2 decimal places.

Question