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d prices
unction at right.
s for
you about
hold if rates
ontinue to sell
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o maturity by
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ume the bond
must make three
of a 10-year,
d provides
does not
payments, we
otal return. To
re is no
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unction will
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d to default
risk? What factors affect a company’s bond rating?
Case Show.
is used, but
rate of
premium
itivity to
o bonds have
o bonds have the
ng for $1,135.90,
price of $1,050.
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$956.52
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Coupon rate: 10%
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Price
$991.88
$1,047.62
$1,028.04
$1,000.00
$973.45
Scratch sheet for Your Choice
Years to Mat: 5
Annual Pmt: $100.00
Current price: $966.65
Par value = FV:
$1,000.00
YTM = 10.9%
Maturity
lly, this
ee Chapter 5
.0%
Your Choice
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Expected inflation of 5% for the next 1
Expected inflation of 6% for the next 1
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7 3.00% 7.29% 0.60% 10.89%
8 3.00% 7.38% 0.70% 11.08%
9 3.00% 7.44% 0.80% 11.24%
10 3.00% 7.50% 0.90% 11.40%
11 3.00% 7.55% 1.00% 11.55%
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18 3.00% 7.72% 1.70% 12.42%
19 3.00% 7.74% 1.80% 12.54%
20 3.00% 7.75% 1.90% 12.65%
21 3.00% 7.76% 2.00% 12.76%
22 3.00% 7.77% 2.10% 12.87%
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29 3.00% 7.83% 2.80% 13.63%
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I J K L M N O P
used in graph.
Now, we want to set up a table that encompasses all of the information for our y
INPUT DATA
Real risk free rate 3.00%
1 3.00% 5.00% 0.00% 8.00%
2 3.00% 5.50% 0.10% 8.60%
3 3.00% 6.33% 0.20% 9.53%
4 3.00% 6.75% 0.30% 10.05%
5 3.00% 7.00% 0.40% 10.40%
6 3.00% 7.17% 0.50% 10.67%
12 3.00% 7.58% 1.10% 11.68%
13 3.00% 7.62% 1.20% 11.82%
14 3.00% 7.64% 1.30% 11.94%
15 3.00% 7.67% 1.40% 12.07%
16 3.00% 7.69% 1.50% 12.19%
17 3.00% 7.71% 1.60% 12.31%
23 3.00% 7.78% 2.20% 12.98%
24 3.00% 7.79% 2.30% 13.09%
25 3.00% 7.80% 2.40% 13.20%
26 3.00% 7.81% 2.50% 13.31%
27 3.00% 7.81% 2.60% 13.41%
28 3.00% 7.82% 2.70% 13.52%
“build” a yield curve based upon these expectations.
Suppose most investors expect the inflation rate to be 5 percent next year, 6 pe
real risk-free rate is 3 percent. The maturity risk premium is zero for securities
securities, and then the MRP increases by 0.1 percent per year thereafter for 2
on 1-year, 10-year, and 20-year Treasury securities? Draw a yield curve with th
yield curve is upward sloping?
diately
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Q R S T