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1. In many instances, investors are willing to pay prices above the “true price” of a bond or a stock calculated/estimated using the approaches and techniques discussed in Chapters 6. Explain what factors would motivate investors to ignore the fundamental principles of bond valuation and stock valuation?

Book: Fundamentals of Corporate Finance by Berk, Demarzo

Chapter 6

2a. what is the maturity of the bond in years?

2b. what is the coupon rate (in percent)

2c. what is the face value?

4. The following table summarizes prices of various default-free zero- coupon bonds. (expressed as a percentage of face value)

a. Compute the yield to maturity for each bond

b. Plot the zero-coupon yield curve (for the first five years)

c. Is the yield curve upward sloping, downward sloping, or flat?

11. Suppose a 10- year, \$1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of \$1034.74

a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)

b. If the bond’s yield to maturity changes to 9% what will the bond be?

15. Suppose a 7-year, \$1000 bond with an 8% coupon rate and semi annual coupons is trading with a yield to maturity of 6.75%

a. is this bond currently trading at a discount, at par, or at a premium? Explain.

b. If the yield to maturity of the bond rises to 7% (APR with semiannual compounding) what price will the bond trade for?

25. Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon payment) and a face value of \$1000. Andrew believes it can get a rating from A from Standard & Poor’s. However, due to recent financial difficulties at the company, Standard and poor’s is warning that it may downgrade Andrew Industries bonds to BBB. Yields on A-rated, long-term bonds are currently 6.5% and yields on BBB-rated 6.9 %.

a. What is the price of the bond if Andrew Industries maintains the A rating for the bond issue?

b. What will the price of the bond be if it is downgraded?

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