Chapter 3: 10-3B (page 328)
What would be the likely effect on the yield to maturity of a bond resulting from:
a. An increase in the issuing firm’s times-interest-earned ratio?
b. An increase in the issuing firm’s debt-equity ratio?
c. An increase in the issuing firm’s quick ratio?
a. Drop
b. Increase
c. Decrease
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Is the decrease in a bond’s price corresponding to an increase in its yield to maturity more or less than the price increase resulting from a decrease in the yield of equal magnitude?
A bond currently sells for \(1,050, which gives it a yield to maturity of 6%. Suppose that if the yield increases by 25 basis points, the price of the bond falls to \)1,025. What is the duration of this bond?
Fill in the table below for the following zero-coupon bonds, all of which have par values of \(1,000
Price | Maturity (years) | Yield to Maturity |
\)400 | 20 | ? |
\(500 | 20 | ? |
\)500 | 10 | ? |
? | 10 | 10% |
? | 10 | 8% |
$400 | ? | 8% |
A zero-coupon bond with face value \(1,000 and maturity of five years sells for \)746.22. What is its yield to maturity? What will happen to its yield to maturity if its price falls immediately to $730?
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are essentially going to resemble level perpetuities of $1 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds.
a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position?
b. What must be the face value of the two zeros to fund the plan?
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