A 10-year corporate bond has coupon rate equal to 5.5%. This bond has a par value equal to 100, pays annual coupons on November 17, and matures on November 17, 2033. Because of the credit risk associated with the payments of this bond, the market is discounting its cash flows using yields that are 3 percentage points higher than the yields required from credit- risk-free government bonds. As a result, this corporate bond has a yield to maturity equal to 6.711%. A. What is the price of the 10-year corporate bond? B. Using the first-order linear approximation, what would be the percentage change in the price of this 10-year corporate bond if its yield to maturity decreases by 0.5 percentage points?

A 10-year corporate bond has coupon rate equal to 5.5%. This bond has a par value equal to 100, pays annual coupons on November 17, and matures on November 17, 2033. Because of the credit risk associated with the payments of this bond, the market is discounting its cash flows using yields that are 3 percentage points higher than the yields required from credit- risk-free government bonds. As a result, this corporate bond has a yield to maturity equal to 6.711%. A. What is the price of the 10-year corporate bond? B. Using the first-order linear approximation, what would be the percentage change in the price of this 10-year corporate bond if its yield to maturity decreases by 0.5 percentage points?

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter5: The Cost Of Money (interest Rates)

Section: Chapter Questions

Problem 20PROB

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