10 May HOW DOES THE VALUE CHANGE IF THE MARKET’S REQUIRED YIELD ON A COMPARABLE RISK SECURITY INCREASES TO 10% AND THEN DECREASES TO 6%?
Westpac Banking has a bond issue that pays 8% interest with a $100 face value. The bond matures in 20 years. The required yield for similar risk securities is 7%.1.Calculate the value of the bond.2.How does the value change if the market’s required yield on a comparable risk security increases to 10% and then decreases to 6%?3.Discuss your answers in (2) as they relate to interest rate risk premium and discount bonds.4.Assume the bond matures in 10 years instead of 20 years. Recalculate your answers in (2).5. Compare the results you find in (2) and (4) and discuss the change in the value of long-term and short-term bonds when the market’s required yield changes.6. Provide some examples (event occurring in the financial markets in the industry and within the firm) which could cause (a) an increase and (b) a decrease in the required yield.7.Investigate the Australian bond and share markets: search for their market value (market capitalization) in dollars and as a percentage of Australia’s GDP. Compare and discuss your answers. Notes: 2014 2015 2016 figures are all acceptable however more recent figures are preferable. Comparable figures are required (i.e. balances should be recorded in the same year).
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