M Finance 3rd Edition Cornett Solutions Manual Full Chapter PDF

M Finance 3rd Edition Cornett Solutions
Manual
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Chapter 07 – Valuing Bonds
CHAPTER 7 – VALUING BONDS
questions
LG1 1. What does a call provision allow issuers to do, and why would they do it?
A call provision on a bond issue allows the issuer to pay off the bond debt early at a cost of the
principal plus any call premium. Most of the time when a bond issue is called, it is because
interest rates have substantially declined in the economy. The issuer calls the existing bonds
and issues new bonds at the lower interest rate. This reduces the interest payments the issuer
must pay each year.
LG2 2. List the differences between the new TIPS and traditional Treasury bonds.
Traditional Treasury bonds have a fixed principal and constant interest payments. Because the
principal and coupon rate are fixed, interest rate changes in the economy cause the market price
of the bonds to have large fluctuations. On the other hand, the principal of a TIPS increases with
the rate of inflation. Similar to a T-bond, the TIPS has a constant coupon rate. However, since
the principal of the TIPS increases over time, the interest payment also increases over time. This
inflation rate adjustment of a TIPS’ principal every six months reduces the amount of downward
price change in the price of the bond when interest rates increase.
LG2 3. Explain how mortgage-backed securities work.
A large amount of home mortgages are purchased and pooled together. The homeowners pay
interest and principal monthly on their mortgages. Bonds are issued from the pool of mortgages,
using the mortgages as collateral. The interest payments and bond principal payments for these
mortgage-backed securities (MBS) originate from the mortgage borrowers and flow through the
pool of mortgages. As the homeowners pay off their mortgages over time, the MBS are also paid.
LG3 4. Provide the definitions of a discount bond and a premium bond. Give examples.
A discount bond is simply a bond that is selling below its par value. It would be quoted at a price
that is less than 100 percent of par, like 99.05. A premium bond is a bond selling above its par
value. Its price will be quoted as over 100 percent of par value, like 101.15. A bond becomes a
discount bond when market interest rates rise above the bond’s coupon rate. A bond becomes a
premium bond when market interest rates fall below the bond’s coupon rate.
7-1
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Education.
LG4 5. Describe the differences in interest payments and bond price between a 5 percent coupon bond
and a zero coupon bond.
The 5 percent coupon bond pays annual interest of 5 percent of the bond’s par value. For a
$1,000 par value bond, this would be $50 per year. This interest might be paid in two payments
of $25 each. The price of the coupon bond tends to stay near its par value. The zero coupon bond
pays no interest payments. The bondholder earns a return from the increase of the bond’s market
price over time. The bond’s price is initially much lower than its par value. When the zero
coupon bond finally matures, the par value is paid.
LG5 6. All else equal, which bond’s price is more affected by a change in interest rates, a short-term
bond or a longer-term bond? Why?
All else equal, a long-term bond experiences larger price changes when interest rates change than
a short-term bond. A bond’s price is the present value of all its cash flows. Changes in the
discount rate (the interest rate) impact present values more for cash flows that are further out in
time.
LG5 7. All else equal, which bond’s price is more affected by a change in interest rates, a bond with a
large coupon or a small coupon? Why?
The price of the bond with the small coupon will be impacted more by a change in interest rates
than the price of the large coupon bond. For a small coupon bond, the cash flows are weighted
much more toward the maturity date because of the small interest payments. The large coupon
bond has high interest payments, many of which occur soon. These higher cash flows made
earlier dampen the impact of interest rate changes because those changes in the discount rate
impact the earlier cash flows to a lesser degree than the later cash flows.
LG5 8. Explain how a bond’s interest rate can change over time even if interest rates in the economy
do not change.
Because of the yield curve, there are different interest rates that apply to each time to maturity.
So, as a bond gets closer to its maturity date, different interest rates may apply to its discounting
even when interest rates in the economy have not changed.
LG6 9. Compare and contrast the advantages and disadvantages of the current yield computation
versus yield to maturity calculations.
The current yield computation is useful because it is a very simple one. It provides a quick and
easy assessment of what the bond offers the investor in return. But it measures only the return
from the interest payments. The full return to an investor also includes the capital gain or loss the
bond will experience if it is selling as a discount or premium bond. The yield to maturity
computation is more difficult, but it incorporates the full return the bond offers to investors.
7-2
Education.
LG6 10. What is the yield to call and why is it important to a bond investor?
Many bonds do not survive until their maturity date because they get paid early through a call
provision. The yield to call is the yield that would be earned if the bond is purchased at today’s
price and held until it is called by the issuer. The computation incorporates the additional call
premium that is paid with the principal.
LG6 11. What is the purpose of computing the equivalent taxable yield of a municipal bond?
Municipal bonds offer a tax advantage for the bondholder that other kinds of bonds do not offer.
Thus, their yield to maturity is not directly comparable to that of other bonds. The equivalent
taxable yield (ETY) is an adjustment to the yield to make it comparable to taxable bonds. Bond
investors can use the ETY to assess which bond will earn them a higher after-tax return.
LG6 12. Explain why high income and wealthy people are more likely to buy a municipal bond than a
corporate bond.
Individual bondholders do not owe taxes on interest payments received from municipal bonds.
This tax advantage is more valuable to individuals who are in a higher marginal tax bracket.
Because wealthy individuals are usually in a higher tax bracket, this tax advantage is more
valuable to them.
LG7 13. Why does a Treasury bond offer a lower yield than a corporate bond with the same time to
maturity? Could a corporate bond with a different time to maturity offer a lower yield? Explain.
The Treasury bond has lower credit risk than the corporate bond. Given the risk/return
relationship, lower risk is associated with lower expected return. Thus, all else equal, a Treasury
bond will offer a lower yield to maturity than a corporate bond. However, if the yield curve
slopes upward, then shorter term to maturity bonds will require a smaller interest rate than longer
term bonds. So, it is possible that a short-term corporate bond would offer a lower yield than a
long-term Treasury bond.
LG7 14. Describe the difference between a bond issued as a high-yield bond and one that has become
a “fallen angel.”
Both of these bonds would be rated as BB or below. The bond referred to as a “fallen angel”
would have been issued by a firm that was a successful, financially stable firm but one that has
recently struggled. The bondholder would have purchased the bond when it was rated investment
grade (BBB or above), but now holds a “fallen angel”, or junk bond, due to a decline in the
issuer’s financial status. The bond issued as a high-yield, or junk, bond would
7-3
Education.
have been issued after the firm’s financial condition had already deteriorated. The purchaser of
this bond bought the bond initially as a junk bond.
LG8 15. What is the difference in the trading volume between Treasury bonds and corporate bonds?
Give examples and/or evidence.
There is high trading volume in Treasury bonds and low trading volume in corporate bonds.
problems
basic problems
LG1 7-1 Interest Payments Determine the interest payment for the following three bonds: 3.5
percent coupon corporate bond (paid semiannually), 4.25 percent coupon Treasury note,
and a corporate zero coupon bond maturing in ten years. (Assume a $1,000 par value.)
3.5 percent coupon corporate bond (paid semiannually): 0.5 × 0.035 × $1,000 = $17.50
4.25 percent coupon Treasury note: 0.5 × 0.0425 × $1,000 = $21.25
Corporate zero coupon bond maturing in 10 years: 0.00 × $1,000 = $0
LG1 7-2 Interest Payments Determine the interest payment for the following three bonds: 4.5percent
coupon corporate bond (paid semiannually), 5.15 percent coupon Treasury note, and a corporate
zero coupon bond maturing in 15 years. (Assume a $1,000 par value.)
4.5 percent coupon corporate bond (paid semiannually): 0.5 × 0.045 × $1,000 = $22.50
5.15 percent coupon Treasury note: 0.5 × 0.0515× $1,000 = $25.75
Corporate zero coupon bond maturing in 10 years: 0.00 × $1,000 = $0
LG1 7-3 Time to Maturity A bond issued by Ford on May 15, 1997 is scheduled to mature on May
15, 2097. If today is November 16, 2014, what is this bond’s time to maturity?
May 15, 2097 minus November 16, 2014 = 82 years and 6 months
LG1 7-4 Time to Maturity A bond issued by IBM on December 1, 1996 is scheduled to mature on
December 1, 2096. If today is December 2, 2015, what is this bond’s time to maturity?
December 1, 2096 minus December 2, 2015 = 81 years
LG1 7-5 Call Premium A 6 percent corporate coupon bond is callable in five years for a call
premium of one year of coupon payments. Assuming a par value of $1,000, what is the price
paid to the bondholder if the issuer calls the bond?
Principal + Call premium = $1,000 + 0.06 × $1,000 = $1,060
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Education.
LG1 7-6 Call Premium A 5.5 percent corporate coupon bond is callable in 10 years for a call
premium of one year of coupon payments. Assuming a par value of $1,000, what is the price
paid to the bondholder if the issuer calls the bond?
Principal + Call premium = $1,000 + 0.055 × $1,000 = $1,055
LG2 7-7 TIPS Interest and Par Value A 2.75 percent TIPS has an original reference CPI of 185.4.
If the current CPI is 210.7, what is the current interest payment and par value of the TIPS?
Par value = 210.7 / 185.4 × $1,000 = $1,136.46

Interest payment = 0.5 × 0.0275 × $1,136.46 = $15.63
LG2 7-8 TIPS Interest and Par Value A 3.125 percent TIPS has an original reference CPI of 180.5.
If the current CPI is 206.8, what is the current interest payment and par value of the TIPS?
Par value = 206.8 / 180.5 × $1,000 = $1,145.71

Interest payment = 0.5 × 0.03125 × $1,145.71 = $17.90
LG3 7-9 Bond Quotes Consider the following three bond quotes; a Treasury note quoted at 97:27,
and a corporate bond quoted at 103.25, and a municipal bond quoted at 101.90. If the Treasury
and corporate bonds have a par value of $1,000 and the municipal bond has a par value of
$5,000, what is the price of these three bonds in dollars?
Treasury note at 97:27: (97 + 27/32)% × $1,000 = 0.9784375 × $1,000 = $978.44

Corporate bond at 103.25: 103.25% × $1,000 = 1.0325 × $1,000 = $1,032.50
Municipal bond at 101.90: 101.90% × $5,000 = 1.019 × $5,000 = $5,095.00
LG3 7-10 Bond Quotes Consider the following three bond quotes; a Treasury bond quoted at 106:14,
a corporate bond quoted at 96.55, and a municipal bond quoted at 100.95. If the Treasury and
corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000,
what is the price of these three bonds in dollars?
Treasury note at 106:14: (106 + 14/32)% × $1,000 = 1.064375 × $1,000 = $1,064.38

Corporate bond at 96.55: 96.55% × $1,000 = 0.9655 × $1,000 = $965.50
Municipal bond at 100.95: 100.95% × $5,000 = 1.0095 × $5,000 = $5,047.50
LG4 7-11 Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 20
years if the market interest rate is 3.8 percent.
Use semiannual compounding:
7-5
Education.
FVN $1,000
PV = = = $471.01
(1 + i )N  .038 
40
1 + 
 2 
Or N=40, I=1.9, PMT=0, FV=−1000, CPT PV == 471.01
LG4 7-12 Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 15
years if the market interest rate is 5.75 percent.
Use semiannual compounding:
FVN $1,000
PV = = = $427.27
(1 + i )  .0575 30
N
1 + 
 2 
Or N=30, I=2.875, PMT=0, FV=−1000, CPT PV == 427.27
LG6 7-13 Current Yield What is the current yield of a 3.8 percent coupon corporate bond quoted at a
price of 102.08?
3.8% / 102.08% = 0.0372 = 3.72%
LG6 7-14 Current Yield What is the current yield of a 5.2 percent coupon corporate bond quoted at a
price of 96.78?
5.2% / 96.78% = 0.05373 = 5.37%
LG6 7-15 Taxable Equivalent Yield What is the taxable equivalent yield on a municipal bond with a
yield to maturity of 3.5 percent for an investor in the 33 percent marginal tax bracket?
Use equation 7.4:
Muni yield 3.5%

Equivalent taxable yield = = = 5.22%
1-Tax rate 1 − 0.33
LG6 7-16 Taxable Equivalent Yield What is the taxable equivalent yield on a municipal bond with a
yield to maturity of 2.9 percent for an investor in the 28 percent marginal tax bracket?
Use equation 7.4:
Muni yield 2.9%

1-Tax rate 1 − 0.28
LG7 7-17 Credit Risk and Yield Rank from highest credit risk to lowest risk the following bonds,
with the same time to maturity, by their yield to maturity: Treasury bond with yield of 5.55
percent, IBM bond with yield of 7.49 percent, Trump Casino bond with yield of 8.76 percent,
and Banc One bond with a yield of 5.99 percent.
7-6
Education.
Trump Casino bond with yield of 8.76 percent

IBM bond with yield of 7.49 percent
Banc One bond with yield of 5.99 percent
Treasury bond with yield of 5.55 percent
LG7 7-18 Credit Risk and Yield Rank the following bonds in order from lowest credit risk to highest
risk, all with the same time to maturity, by their yield to maturity: Treasury bond with yield of
4.65 percent, United Airline bond with yield of 9.07 percent, Bank of America bond with a yield
of 6.25 percent, and Hewlett/Packard bond with yield of 6.78 percent.
Treasury bond with yield of 4.65 percent

Bank of America bond with yield of 6.25 percent
Hewlett/Packard bond with yield of 6.78 percent
United Airline bond with yield of 9.07 percent
intermediate problems
LG2 7-19 TIPS Capital Return Consider a 3.5 percent TIPS with an issue CPI reference of 185.6. At
the beginning of this year, the CPI was 193.5 and was at 199.6 at the end of the year. What was
the capital gain of the TIPS in dollars and in percentage terms?
Gain = End of year value – Beginning of year value =

199.6 / 185.6 × $1,000 − 193.5 / 185.6 × $1,000 = $1,075.43 − $1,042.56 = $32.87
As a percentage, the gain was = $32.87 / $1,042.56 = 3.15%
LG2 7-20 TIPS Capital Return Consider a 2.25 percent TIPS with an issue CPI reference of 187.2.
At the beginning of this year, the CPI was 197.1 and was at 203.8 at the end of the year. What
was the capital gain of the TIPS in dollars and in percentage terms?

203.8 / 187.2 × $1,000 − 197.1 / 187.2 × $1,000 = $1,088.68 − $1,052.88 = $35.80
As a percentage, the gain was = $35.80 / $1,052.88 = 3.40%
LG4 7-21 Compute Bond Price Compute the price of a 3.8 percent coupon bond with 15 years left to
maturity and a market interest rate of 6.8 percent. (Assume interest payments are semiannual.) Is
this a discount or premium bond?
 1 
1 − (1 + 0.034 )30  $1,000
Bond Price = $19.00   + = $353 .869 + $366 .762 = $720 .63
  (1 + 0.034 )
30
0.034
 
or TVM calculator: N = 30, I = 3.4, PMT = 19.00, FV = 1000; CPT PV = -720.63
Since the bond’s price is less than $1,000, it is a discount bond.
7-7
Education.
LG4 7-22 Compute Bond Price Compute the price of a 5.6 percent coupon bond with 10 years left to
 1 
1 − (1 + 0.035)20  $1,000
Bond Price = $28.00   + = $397.95 + $502.56 = $900.51
  (1 + 0.035)
20
0.035
 
 
or TVM calculator: N = 20, I = 3.5, PMT = 28, FV = 1000; CPT PV = -900.51

LG4 7-23 Compute Bond Price Calculate the price of a 5.2 percent coupon bond with 18 years left to
 1 
1 − (1 + 0.023)36  1,000
Bond Price = $26.00   + = $631.87 + $441.04 = $1,072.91
  (1 + 0.023)
36
0.023
 
 
or TVM calculator: N = 36, I = 2.3, PMT = 26, FV = 1000; CPT PV = -1,072.91
Since the bond’s price is greater than $1,000, it is a premium bond.
LG4 7-24 Compute Bond Price Calculate the price of a 5.7 percent coupon bond with 22 years left to
 1 
1 − (1 + 0.0325 )44  $1,000
Bond Price = $28.50   + = $662 .24 + $244 .81 = $907 .05
  (1 + 0.0325 )
44
0.0325
 

LG5 7-25 Bond Prices and Interest Rate Changes A 5.75 percent coupon bond with 10 years left to
maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield
to maturity will be 6.0 percent. What is the change in price the bond will experience in dollars?
Compute the current bond price:
 1 
1 − (1 + 0.0325)20  $1,000
Bond Price = $28.75   + = $418.01 + $527.47 = $945.48
  (1 + 0.0325)
20
0.0325
 
 
7-8
Education.
Now compute the price in one year:
 1 
1 − (1 + 0.029 )18  $1,000
Bond Price = $28.75   + = $398 .777 + $597 .755 = $996 .53
  (1 + 0.029 )
18
0.029
 
or TVM calculator: N = 18, I = 3.0 PMT = 28.75, FV = 1000; CPT PV = -$982.81
So, the dollar change in price is:
$996.53 − $945.48 = $37.33
to maturity will be 6.8 percent. What is the change in price the bond will experience in dollars?
 1 
1 − (1 + 0.036)28  $1,000
Bond Price = $32.50   + = $567.42 + $371.47 = $938.89
  (1 + 0.036)
28
0.036
 
 
 1 
1 − (1 + 0.034)26  $1,000
Bond Price = $32.50   + = $555.14 + $419.24 = $974.38
  (1 + 0.034)
26
0.034
 
 

$974.38 − $938.89 = $35.49
LG6 7-27 Yield to Maturity A 5.65 percent coupon bond with 18 years left to maturity is offered for
sale at $1,035.25. What yield to maturity is the bond offering? (Assume interest payments are
semiannual.)
TVM calculator: N = 36, PV = -1,035.25, PMT = 28.25, FV = 1000; CPT I = 2.671% YTM =
2.671% × 2 = 5.34%
7-9
Education.
LG6 7-28 Yield to Maturity A 4.30 percent coupon bond with 14 years left to maturity is offered for
sale at $943.22. What yield to maturity is the bond offering? (Assume interest payments are
semiannual.)
TVM calculator: N = 28, PV = -943.22, PMT = 21.5, FV = 1000; CPT I = 2.432% YTM =
2.432% × 2 = 4.86%
LG6 7-29 Yield to Call A 6.75 percent coupon bond with 26 years left to maturity can be called in six
years. The call premium is one year of coupon payments. It is offered for sale at $1,135.25.
What is the yield to call of the bond? (Assume interest payments are semiannual.)
TVM calculator: N = 12, PV = -1,135.25, PMT = 33.75, FV = 1067.50; CPT I = 2.541%

YTC = 2.541% × 2 = 5.08%
LG6 7-30 Yield to Call A 5.25 percent coupon bond with 14 years left to maturity can be called in
four years. The call premium is one year of coupon payments. It is offered for sale at $1,075.50.
What is the yield to call of the bond? (Assume interest payments are semiannual.)
TVM calculator: N = 8, PV = -1,075.50, PMT = 26.25, FV = 1,052.50; CPT I = 2.193% YTC =

2.193% × 2 = 4.39%
LG6 7-31 Comparing Bond Yields A client in the 39 percent marginal tax bracket is comparing a
municipal bond that offers a 4.5 percent yield to maturity and a similar-risk corporate bond that
offers a 6.45 percent yield. Which bond will give the client more profit after taxes?
First determine the ETY:
Muni yield 4.5%

1-Tax rate 1 − 0.39
Since 7.38 percent is greater than 6.45 percent, the client should take the municipal bond.
LG6 7-32 Comparing Bond Yields A client in the 28 percent marginal tax bracket is comparing a
municipal bond that offers a 4.5 percent yield to maturity and a similar-risk corporate bond that
offers a 6.45 percent yield. Which bond will give the client more profit after taxes?
First determine the ETY:
Muni yield 4.5%

1-Tax rate 1 − 0.28
Since 6.25 percent is less than 6.45 percent, the client should take the corporate bond.
advanced problems
7-10
Education.
LG2 7-33 TIPS Total Return Reconsider the 3.5 percent TIPS discussed in problem 7-19. It was
issued with CPI reference of 185.6. The bond is purchased at the beginning of the year (after the
interest payment), when the CPI was 193.5. For the interest payment in the middle of the year,
the CPI was 195.1. Now, at the end of the year, the CPI is 199.6 and the interest payment has
been made. What is the total return of the TIPS in dollars and in percentage terms for the year?
Capital gain = End of year value – Beginning of year value =

199.6 / 185.6 × $1,000 – 193.5 / 185.6 × $1,000 = $1,075.43 − $1,042.56 = $32.87
The mid-year interest payment was: 0.5 × 0.035 × 195.1 / 185.6 × $1,000 = $18.40
The end-of-year interest payment was: 0.5 × 0.035 × 199.6 / 185.6 × $1,000 = $18.82
Total dollar return = $32.87 + $18.40 + $18.82 = $70.09
As a percentage, the return was = $70.09 / $1,042.56 = 6.72%
LG2 7-34 TIPS Total Return Reconsider the 2.25 percent TIPS discussed in problem 7-20. It was
issued with CPI reference of 187.2. The bond is purchased at the beginning of the year (after the
interest payment), when the CPI was 197.1. For the interest payment in the middle of the year,
the CPI was 200.1. Now, at the end of the year, the CPI is 203.8 and the interest payment has
been made. What is the total return of the TIPS in dollars and in percentage terms for the year?

203.8 / 187.2 × $1,000 − 197.1 / 187.2 × $1,000 = $1,088.68 − $1,052.88 = $35.80
The mid-year interest payment was: 0.5 × 0.0225× 200.1 / 187.2 × $1,000 = $12.03
The end-of-year interest payment was: 0.5 × 0.0225× 203.8 / 187.2 × $1,000 = $12.25
Total dollar return = $35.80 + $12.03 + $12.25 = $60.08
As a percentage, the return was = $60.08 / $1,052.88 = 5.71%
to maturity will be 6.0 percent. If this occurs, what would be the total return of the bond in
dollars and percent? (Assume interest payments are semiannual.)
 1 
1 − (1 + 0.0275)44  $1,000
Bond Price = $31.25   + = $791.92 + $303.11 = $1,095.03
  (1 + 0.0275)
44
0.0275
 
 
or TVM calculator: N = 44, I = 2.75, PMT = 31.25, FV = 1,000; CPT PV = -1,095.03
 1 
1 − (1 + 0.03)42  $1,000
Bond Price = $31.25   + = $740.67 + $288.96 = $1,029.63
  (1 + 0.03)
42
0.03
 
 
7-11
Education.
or TVM calculator: N = 42, I = 3.0, PMT = 31.25, FV = 1,000; CPT PV = -1,029.63
Total return = Dollar change in price + Interest payments:

$1,029.63 − $1,095.03 + $62.50 = -$2.90
The percentage return is: -$2.90 / $1,095.03 = -0.26%
to maturity will be 7.0 percent. If this occurs, what would be the total return of the bond in
dollars and percentage terms? (Assume interest payments are semiannual.)
 1 
1 − (1 + 0.03125)26  $1,000
Bond Price = $37.50   + = $660.84 + $449.30 = $1,110.14
  (1 + 0.03125)
26
0.03125
 
 
or TVM calculator: N = 26, I = 3.125, PMT = 37.50, FV = 1000; CPT PV = -1,110.14
 1 
1 − (1 + 0.035)24  $1,000
Bond Price = $37.50   + = $602.19 + $437.96 = $1,040.15
  (1 + 0.035)
24
0.035
 
 
or TVM calculator: N = 24, I = 3.5, PMT = 37.50, FV = 1000; CPT PV = -1,040.15
Total return = Dollar change in price + Interest payments:

$1,040.15 − $1,110.14 + $75.00 = $5.01
The percentage return is: $5.01 / $1,110.14 = 0.45%
LG6 7-37 Yields of a Bond A 2.50 percent coupon municipal bond has 12 years left to maturity and
has a price quote of 98.45. The bond can be called in four years. The call premium is one year of
coupon payments. Compute and discuss the bond’s current yield, yield to maturity, taxable
equivalent yield (for an investor in the 35 percent marginal tax bracket), and yield to call.
(Assume interest payments are semiannual and a par value of $5,000.)
Current yield = (0.025 × $5,000) / (0.9845 × $5,000) = 2.50% / 98.45% = 2.54%
TVM calculator: N = 24, PV = -4,922.50, PMT = 62.50, FV = 5000; CPT I = 1.3258%

YTM = 1.3258% × 2 = 2.65%
7-12
Education.
Muni yield 2.65%

1-Tax rate 1 − 0.35
TVM calculator: N = 8, PV = -4,922.50, PMT = 62.50, FV = 5125; CPT I = 1.753%

YTC = 1.753% × 2 = 3.51%
The current yield is higher than the coupon rate because this is currently a discount bond. This is
also shown by the YTM, which is greater than the coupon rate. The YTC is comparatively high,
but it is currently unlikely that the bond will be called early since interest rates have risen.
LG6 7-38 Yields of a Bond A 3.85 percent coupon municipal bond has 18 years left to maturity and
has a price quote of 103.20. The bond can be called in eight years. The call premium is one year
of coupon payments. Compute and discuss the bond’s current yield, yield to maturity, taxable
equivalent yield (for an investor in the 35 percent marginal tax bracket), and yield to call.
(Assume interest payments are semiannual and a par value of $5,000.)
Current yield = (0.0385 × $5,000) / (1.0320 × $5,000) = 3.85% / 103.20% = 3.73%

TVM calculator: N = 36, PV = -5,160, PMT = 96.25, FV = 5000; CPT I = 1.803%
YTM = 1.803% × 2 = 3.61%
Muni yield 3.61%

1-Tax rate 1 − 0.35
TVM calculator: N = 16, PV = -5,160, PMT = 96.25, FV = 5192.50; CPT I = 1.90%

YTC = 1.90% × 2 = 3.80%
The current yield is lower than the coupon rate because this is currently a premium bond. This is
also shown by the YTM , which is lower than the coupon rate. The YTC is comparatively high,
but it is currently unlikely that the bond will be called early since interest rates are only a little
lower than the coupon rate and the call premium would have to be paid.
LG7 7-39 Bond Ratings and Prices A corporate bond with a 6.5 percent coupon has 15 years left to
maturity. It has had a credit rating of BBB and a yield to maturity of 7.2 percent. The firm has
recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The
new appropriate discount rate will be 8.5 percent. What will be the change in the bond’s price in
dollars and percentage terms? (Assume interest payments are semiannual.)
 1 
1 − (1 + 0.036)30  $1,000
Bond price = $32.50   + = $590.3223 + $346.1046 = $936.43
  (1 + 0.036)
30
0.036
 
 
Now compute the price after the rating change:
7-13
Education.
 1 
1 − (1 + 0.0425)30  $1,000
Bond price = $32.50   + = $545.32 + $286.89 = $832.21
  (1 + 0.0425)
30
0.0425
 
 

$832.21 − $936.43 = -$104.22
The percentage return is: -$104.22 / $936.43 = -11.13%
LG7 7-40 Bond Ratings and Prices A corporate bond with a 6.75 percent coupon has 10 years left
to maturity. It has had a credit rating of BB and a yield to maturity of 8.2 percent. The firm has
recently become more financially stable and the rating agency is upgrading the bonds to BBB.
The new appropriate discount rate will be 7.1 percent. What will be the change in the bond’s
price in dollars and percentage terms? (Assume interest payments are semiannual.)
 1 
1 − (1 + 0.041)20  $1,000
Bond price = $33.75   + = $454.64 + $447.70 = $902.34
  (1 + 0.041)
20
0.041
 
 
Now compute the price after the rating change:

 1 
1 − (1 + 0.0355)20  $1,000
Bond price = $33.75   + = $477.51 + $497.73 = $975.24
  (1 + 0.0355)
20
0.0355
 
 
or TVM calculator: N = 20, I = 3.55 PMT = 33.75, FV = 1000; CPT PV = -975.24

$975.24 − $902.34 = $72.90
The percentage return is: $72.90 / $902.34 = 8.08%
7-41 Spreadsheet Problem Say that in June of 2014, a company issued bonds that are
scheduled to mature in June of 2017. The coupon rate is 5.75 percent and is paid semiannually.
The bond issue was rated AAA.
a. Build a spreadsheet that shows how much money the firm pays for each interest rate payment
and when those payments will occur if the bond issue sells 50,000 bonds.
b. If the bond issue rating would have been BBB, then the coupon rate would have been 6.30
percent. Show the interest payments with this rating. Explain why bond ratings are important to
firms issuing capital debt.
7-14
Education.
c. Consider that interest rates in the economy increased in the first half of 2012. If the firm
would have issued the bonds in January of 2012, then the coupon rate would have only been 5.40
percent. How much extra money per year is the firm paying because it issued the bonds in June
instead of January?
The spreadsheet might look like:
a. b. c.
Coupon Rate= 5.75% 6.30% 5.40%
Par Value = $1,000 $1,000 $1,000
Number of Bonds = 50,000 50,000 50,000
Interest payments Interest payments Interest payments

Jun-12 $ 0 $ 0 $1,350,000
Dec-12 1,350,000
Jun-13 1,350,000
Dec-13 1,350,000
Jun-14 1,350,000
Dec-14 1,437,500 1,575,000 1,350,000
Jun-15 1,437,500 1,575,000 1,350,000
Dec-15 1,437,500 1,575,000 1,350,000
Jun-16 1,437,500 1,575,000 1,350,000
Dec 16 1,437,500 1,575,000 1,350,000
June 17 1,437,500 1,575,000 1,350,000
1
B. The better the bond rating, the lower the interest rate a firm will have to pay. In this example,
the firm saves $275,000 each year in interest payments with the higher bond rating.
C. The firm is paying $175,000 per year more in interest because it issued its bonds after the
rates increased.
research it!
Bond Information Online
Information on the bond market is widely available in papers like The Wall Street Journal and
Barron’s. Bond information can also be found online at financial websites like
finance.yahoo.com and http://www.finra.org. The bond credit rating agencies also
maintainwebsites with their own bond market news.
You can follow the bond market easily at places like Yahoo! Finance . Click on the Bond
link in the menu to go to their Bond Center. Bond yields for various maturity Treasury securities
are shown for today and for previous days. The Bond Composite Rates link shows similar
comparisons for municipal and corporate bonds too.
Bond calculators are also available for free on the Web. Compare a bond price result from
your calculator or the price equation with the online bond calculator result at Investopedia.
(www.investopedia.com/calculator/BondPrice.aspx)
7-15
Education.
SOLUTION: All answers will be different. Here is an example answer:
An example done on the website…
 1 
1 − (1 + 0.02)6  $1,000
Bond price = $17.50   + = $98.03 + $887.97 = $986.00
  (1 + 0.02)
6
0.02
 
 
or TVM calculator: N = 6, I = 2, PMT = 17.50, FV = 1000; CPT PV = -986.00

All computations are the same.
integrated mini-case: Corporate Bond Credit Risk Changes and Bond Prices
Land’o’Toys is a profitable, medium-sized, retail company. Several years ago, it issued a 6.5
percent coupon bond, which pays interest semiannually. The bond will mature in 10 years and is
currently priced in the market as $1,037.19. The average yields to maturity for 10-year corporate
bonds are reported in the following table by bond rating.
Bond Rating Yield (%) Bond Rating Yield (%)

AAA 5.4 BB 7.3
AA 5.7 B 8.2
A 6.0 CCC 9.2
BBB 6.5 CC 10.5
C 12.0
D 14.5
Periodically, one company will purchase another by buying all of the target firm’s stock. The
bonds of the target firm continue to exist. The debt obligation is assumed by the new firm. The
credit risk of the bonds often changes because of this type of an event.
7-16
Education.
Suppose that the firm Treasure Toys makes an announcement that they are purchasing
Land’o’Toys. Due to Treasure Toy’s projected financial structure after the purchase, Standard &
Poor’s states that the bond rating for Land’o’Toys bonds will change to BB.
a. Compute the yield to maturity of Land’o’Toys bonds before the purchase announcement
and use it to determine the likely bond rating.
b. Assume the bond’s price changes to reflect the new credit rating. What is the new price?
Did the price increase or decrease?
c. What is the dollar change and percentage change in the bond price?
d. How do the bond investors feel about the announcement?
SOLUTION:
a. TVM calculator: N = 20, PV = -1,037.19, PMT = 32.50, FV = 1000 CPT I = 3.00%
YTM = 3.00% × 2 = 6.00%
This bond is likely rated as an “A.”
b. The new YTM will likely be 7.3 percent annually, so the price will change to:
TVM calculator: N = 20, I = 3.65, PMT = 32.50, FV = 1000; CPT PV = -943.91
The price decreased because the bond got riskier.
c. The price change would be $943.91 − $1,037.19 = -$93.28
The change as a percentage would be -$93.28 / $1,037.19 = -8.99%
d. In a firm buyout, the stockholders of the target firm generally earn a nice profit. However, the
bond holders of the target firm can be unhappy if the new combined firm has a worse bond
rating, like in this case.
7-17
Education.
Another random document with
no related content on Scribd:
class of the Jews of Warsaw. While the masses of the nation, cut-off
from all but commercial intercourse with their Christian neighbours,
live huddled together in separate quarters, fed on the traditions of
the past, and observing, in dress, diet and deportment, the
ordinances of the Talmud in all their ancient strictness, a small
minority of their cultured brethren has overstepped the narrow limits
of orthodox Judaism and identified itself in all things, save creed,
with the Poles, whose national aspirations it shares and with whom it
does not even shrink from intermarrying occasionally. But this
reconciliation is confined to that infinitesimal class which, thanks to
its wealth, is free from persecution, and in temperament, sentiment,
and ideas belongs to the most advanced section of Occidental Jews
rather than to the Jewry of Eastern Europe. Besides, it is a
reconciliation strenuously opposed by the Russian authorities which,
while inciting the Poles against the Jews, encourage the Jews to
cling to their exclusiveness and to resist all Polish national
aspirations as alien to them.
Yet, in spite of all disabilities, and as though in quiet mockery of
them, the Russian Jews contrive not only to exist, but, in some
degree, to prosper. Their skill, their sobriety, their industry, their
indomitable patience, their reciprocity, and their cunning—all
fostered by the persecution of centuries—enable them to hold their
own in the struggle, and to evade many of the regulations which are
intended to bring about their extinction. They often obtain a tacit
permission to live in various trading places beyond the “pale,” and in
many villages in which they have no legal right of residence.
Vocations forbidden by law are pursued by the connivance of corrupt
officials, and the despised outcasts frequently succeed in amassing
large fortunes as merchants or contractors, by the practice of
medicine, or at the Bar, or in earning a respectable livelihood as
professors and authors, and even as Government servants!
Even culture is not allowed to die out. National enthusiasm,
fomented by persecution, and denied political self-expression, finds
an outlet in literature. In spite of the State, the Church, and the
Synagogue, the darkness of the Russian ghetto is illumined by gifted
writers in prose and verse, like Perez, Abramovitch, Spektor,
Goldfaden, and others, who have invested the debased Yiddish
jargon of the Russian Jew with the dignity of their own genius, and
have produced a literature popular in form as well as in sentiment—a
literature which reflects with wonderful vividness and fidelity the
humour and the sadness of Russian life, and under a different guise
carries on Mendelssohn’s educational mission. In addition to these
original works, there is a vast activity in every department of foreign
literature and science, including translations from many European
languages, and a vigorous periodical press which disseminates the
products of Western thought among the masses of the ghetto. So
that the Russian Jew has access, through his own Yiddish, not only
to works of native creation, but also to the most popular of foreign
books, great and otherwise: from Goethe’s Faust and Shakespeare’s
Hamlet to Sir A. Conan Doyle’s Adventures of Sherlock Holmes.
Side by side with these efforts to foster the Yiddish element
proceeds a movement on behalf of the Hebrew element, while the
upper classes of Polish Jews are actively promoting Polish culture
among their poorer Yiddish-speaking brethren. All these movements,
whether conducted on parallel or on mutually antagonistic lines,
supply sure evidence of one thing—the vitality of the Russian Jewry.
This success, however, while affording consolation to the
sufferers, fans the aversion of the persecutors and spurs the
Government to a periodical renewal of the measures of coercion. It is
acknowledged that, under fair conditions, the Russian Jew, owing to
his superior intelligence, versatility, perseverance, and temperance,
would in a few years beat the Russian Christian in every field of
activity. Hence it is the Russian Christian’s interest and resolve to
crush him. This resolve is cynically avowed by Russians of the
highest rank. The late M. De Plehve, Minister of the Interior, in an
audience granted to a deputation of Jews in April, 1904, confessed
with amazing candour that the barbarous treatment of their race was
dictated by no other reason than its superiority over the Russian.
“You are a superior race,” said the Minister. “Therefore, if free
entrance to the High Schools were to be accorded to you, you would
attain, although through worthy and honest means, too much power.
It is not just that the minority should overrule the majority.” He then
proceeded to inform his hearers that he held the Jews responsible
for the revolutionary agitation in the Empire and for the murders of
Imperial functionaries, concluding with a warning and a threat, and
dismissing them with the assurance, “You need not count on
178
obtaining equal rights with the Christian population.”
The eternal feud found another tragic and characteristic
expression on a large scale in the spring of 1903. It was Easter Day.
The good Christian folk of Kishineff, the capital city of Bessarabia,
had been to church where they had heard the glad tidings of their
Lord’s resurrection, had joined in the hymn of triumph, and then had
greeted one another with the kiss of brotherly love and the
salutation, “Christ is risen!” “He is risen, indeed!” Directly after, they
fell upon their fellow-citizens—whose ancestors crucified Christ
nineteen hundred years ago. The Jewish colony was sacked, many
Jews were slaughtered without distinction of sex or age, and their
dwellings, as well as their shops, were looted. Soldiers were seen
helping the rioters in the work of destruction and carrying off their
share of the spoils.
Like its predecessors, this outrage excited profound indignation
in many parts of the civilised world. Protests were raised in France,
in the United States of America, and in Australia. At Melbourne there
was held a crowded meeting, presided over by the Lord Mayor, and
the Anglican Bishop of the city moved a resolution, which was
unanimously carried, expressing “the meeting’s abhorrence of the
merciless outrages committed upon the Kishineff Jews, including
helpless women and children,” and the hope “that the Russian
Government would take effectual measures to prevent the repetition
of crimes which were a stain on humanity at large.” The Catholic
Archbishop of Melbourne moved that the resolution be transmitted to
the Lord Mayor of London. Similar resolutions were adopted at
179
meetings held in Sydney. In London mass meetings were held at
Mile-end and Hyde Park, where thousands of Jews with their women
and children assembled to record their horror at the massacre of
their Russian brethren, in their various tongues—Russian, German,
Yiddish, French, Italian, and English. All the speakers agreed in
tracing the outrages to the instigation or the encouragement of the
Russian Government. The second meeting embodied its sentiments
in the following terms:
“The meeting expresses: (1) Its deep sympathy with all the
sufferers from the riots at Kishineff, and its condolence with the
relatives of the victims. (2) Its admiration for all those who, without
distinction of nationality or creed, risked their lives in defending the
helpless Jewish population. (3) Its indignation at, and abhorrence of,
the conduct of the Russian Government, which, in order to intimidate
the revolutionary forces of the people, failed to take steps to prevent
the cowardly massacre of innocent men, women, and children. (4) Its
belief that only the development of a powerful working-class
movement in Russia can prevent the repetition of similar atrocities.
This meeting also sends fraternal encouragement to all who are
working for the overthrow of the present régime and the advent of
180
Socialism in Russia.”
The conviction that the massacre was due to the direct
inspiration of the Russian Government was shared by others than
the Jews. Dr. Barth, the German Radical Leader, published in Die
Nation, a Berlin weekly journal, an unsigned paper, stated to be from
the pen of a Russian occupying a high position, in which the writer
says:
“M. Plehve, Minister of the Interior, is directly responsible for the
Kishineff massacre. He is a patron of M. Kruschevan, the editor of
the anti-Semite paper Bessarabets, and has even granted him a
subsidy of 25,000 roubles to conduct a second anti-Semite organ at
St. Petersburg called the Znamya. M. Plehve desired to increase the
subsidy, but M. Witte, the Minister of Finances, intervened. M.
Kruschevan then, thanks to M. Plehve’s patronage, was enabled to
draw money from the National Bank without security.”
After asserting that General von Raaben, the Governor of
Bessarabia, did nothing to avert or stop the rioting, while M.
Ostragoff, the Vice-Governor, was actually at the same time a
contributor to the Bessarabets, and also the censor, the writer
proceeds: “M. Plehve desires to divert Christians from their own
grievances, so he conducts a campaign of Jew-baiting. The Czar
was indignant when he heard of the massacre. He wished to send
an aide-de-camp to report on the matter, but M. Plehve managed to
dissuade his Majesty, and sent instead M. Kopuchin, one of his
creatures, who drew up a mild report, which M. Plehve further
doctored before submitting to the Czar.”
Summing up, the writer says; “The Kishineff massacre has
nothing to do with revolutionary tendencies. It is simply the result of
systematic Jew-baiting, organised by M. Plehve, whose position is
still unshaken, and who holds the Czar under his thumb by working
upon his feelings and persuading him that the country is
honeycombed with revolution and anarchy. No change is possible
until M. Plehve has ceased to have the ear of the Czar. Further anti-
181
Semitic disturbances are probable.”
An American diplomatist endorses the statement that M. De
182
Plehve was really responsible for the massacre, while a Russian
Prince affirms that the instigators of the massacre, such as the
Moldavian Kruschevan, editor of the Bessarabets, “were under the
183
personal protection of the Minister.”
Despite the efforts of the Russian Government to represent the
brutal outrage as due solely to a spontaneous explosion of popular
184
fury arising from “national, religious, and economic hatred,”
certain facts which came to light during the mock trial, held towards
the end of that year in the very scene of the massacre, seem to
prove that, though such hatred did exist, the spark which set the
mine on fire was not of popular origin. The passions of the people
had been carefully inflamed by a pamphlet entitled Who is to blame?
—the work of an anti-Semitic agitator of the name of Pronin, who
was in relations with the proprietor of the Novoe Vremya, the
eloquent exponent of Panslavism. But that was not all. Though
special envoys of the Ministry of Justice and the Ministry of the
Interior kept a watchful eye on the course of the proceedings; though
the Court exerted itself to prevent the production of undesirable
evidence; and though, in true mediaeval fashion, an attempt was
made to lay the blame for the crime on the shoulders of the victims—
by stories of a Jew’s assault on a Christian woman, of the
desecration of churches and the murder of priests—yet the evidence
given, even under such conditions, without absolving the populace,
tends to establish the deliberate connivance, not to say the
complicity, of the Government.
A Christian ex-mayor of the city and another respectable citizen
of Kishineff both declared that, in their opinion, the contemptuous
and intolerant attitude of the Christian population towards the Jews is
due to the special legislation to which the latter are subjected. The
ex-mayor further stated that throughout the riots the police and
military authorities refused to intervene on behalf of the victims. The
administrator of the properties of the monasteries in Bessarabia and
two other witnesses deposed that they had repeatedly appealed to
the police to protect the Jews, but in vain. A Jew, whose son had
been butchered before his eyes, testified that he had fallen at the
feet of a police officer and, leading him to the spot where the bodies
of his son and another man were lying in pools of blood, had
besought him, with tears in his eyes, to shield the survivors. The
officer did not raise a finger in their defence. Several policemen also
confessed that, on asking for orders from their superiors, the answer
they had received was, “Let the Jews help themselves; we cannot
help them.” General Beckmann deposed that at the commencement
of the riots he had at his disposal a force amply sufficient to quell the
disturbance, but he received no orders to act. “It was only,” he said,
“when the Governor grew alarmed for the safety of the Christian
185
population that he took measures to allay the fury of the mob.”
The myth of Jewish provocation was also disposed of by a police
officer, who stated that, when the outbreak occurred, there was not a
single Jew in the square in which the outrage was alleged to have
taken place. To conclude, “evidence was given by physicians and
others as to the mutilation of the bodies of murdered Jews, and two
priests of the Orthodox Church testified that the report that the Jews
had desecrated a church and murdered a priest was absolutely
186
without foundation.”
And the punishment for this wholesale assassination of a
harmless and defenceless population?
Two men, convicted of murder, were sentenced to seven and
five years’ penal servitude respectively.
Twenty-two others to periods of imprisonment, ranging from one
to two years, and one to six months.
Forty-eight civil actions for damages that were brought against
187
the accused were all dismissed.
Even Richard the Crusader did better in 1189.
One luminous spot in the gloomy picture is the action of the
Eastern Church. Not only did the priests and monks of Bessarabia
exculpate the Jews from all provocation of the massacre, but even
Father John of Kronstadt publicly condemned the dastardly crime of
his co-religionists.
The only genuine result of the trial and of the revelations made in
its course was to intensify the wrath of the fanatical Russian and
Moldavian populace, both of the town and of the open country, who
threatened reprisals for the punishment of a few of their brother-
butchers. The fear of such reprisals forced many thousands of the
poorer Jews of Bessarabia to migrate into the districts of Russian
and Austrian Poland, which were already congested to a terrible
degree, while those who possessed the necessary means
determined to emigrate from the Czar’s dominions and seek a home
in the West. While the trial was still proceeding, a deputation of
Bessarabian Jews arrived in the city. Their object was to confer with
the heads of the Jewish community, on behalf of their co-religionists
in various rural districts of Bessarabia, with a view to leaving the
country which had declared in so sanguinary a manner its
unwillingness to harbour them. It was proposed that a number of
Jewish families should emigrate to the Argentine Republic and join
their brethren, already settled in that and other parts of America by
Baron Hirsch at different times, especially after the exodus of 1892.
Four thousand souls, the delegates affirmed, were anxious to wind
188
up their affairs and quit the inhospitable country.
Flight, under the apprehension of slaughter, is avowed to be one
of the objects which induced the Russian authorities to connive at
the massacre and to profess their inability to prevent its repetition:
“Russian policy at the present hour,” proudly declares an eminent
Russian anti-Semite, “seems to have one object in view—that of
starting a free emigration of the Jews from Russia. But the total
number of Jewish emigrants during the last twenty years was only
189
about a million.” Obviously, occasional slaughter alone is sadly
insufficient.
As in 1881 and 1891, so in 1903 the Czar’s ministers hastened
to supplement massacre by measures of administrative coercion.
They decided to forbid Jews, until the revision of the laws concerning
them has been accomplished by means of fresh legislation, to
acquire land or real estate, or to enjoy the usufruct thereof, either
within or without the Governments situated within the residential
“pale.” This decision of the Committee of Ministers was submitted to
the Czar and received his approval. Permission, however, was
granted to the Jews to settle and acquire real estate at places within
the “pale,” which in consequence of their industrial development
190
partake of the character of towns. A few months later, at the
moment when the Kishineff trial was drawing to a close, the
Governor-General at Warsaw issued peremptory instructions to all
the Assistant Governors in the Vistula Province, directing them to put
in rigorous force the Law of 1891, which prohibits Jews from
191
purchasing or leasing immoveable property in the rural districts.
This outburst of Jew-hatred was not confined to Bessarabia.
Soon after the Kishineff massacre reports reached this country of
further outrages being apprehended owing to the symptoms of anti-
Semitism manifested by the inhabitants of the western provinces of
the Empire. Nor were these forebodings falsified by events. In the
middle of September, 1903, Jew-baiting was once more indulged in
at Gomel, a town of Mohileff within the Jewish “pale.” A petty
squabble between a Jew and a Christian in the bazaar afforded an
excuse to the co-religionists of the latter to wreck the Jewish quarter.
Several persons were killed on both sides; but the only details
available are official, which in Russia is not a synonym for
192
authentic.
The charge most frequently brought against the Jews by the
Russian people is, as has been shown, their aversion from
productive labour, and their exclusive attachment to traffic in goods
and money. The Russian Government some years ago attempted to
remove the grievance by affording to the Jews facilities for the
pursuit of agriculture. In seven out of the fifteen provinces open to
the Jews, efforts were made to form Jewish agricultural settlements.
But they do not seem to have been attended by conspicuous
success. Towards the end of 1903 an inquiry instituted into the
matter elicited conflicting answers. Three of the seven reports, drawn
up by provincial Governors, are altogether discouraging. It is pointed
out that the Jewish peasant shirks the hard work of tilling the soil and
only helps to reap the produce. In one province, the official
document asserts, sixty per cent. of the Jews have already
abandoned the settlement and turned to the more congenial pursuits
of commerce and industry. Another report draws an unfavourable
comparison between the Jewish and the Christian farmer, and
repeats the opinion that the former takes little interest in the culture
of the soil, preferring less laborious occupations. All three reports
agree in showing that the experiment of making a husbandman of
the Hebrew is a complete failure. On the other hand, we find a fourth
Governor maintaining that in his province the only difference
between a Christian and a Jewish agriculturist consists in their
respective religions. A fifth, while admitting the Jew’s practical ill-
success, attributes it to the smallness of his farm, which forces him
to give up agriculture as profitless, and he adds that under
favourable conditions the results have been not disappointing. The
Governor of Kherson states that, though at first the Jews evinced
little inclination to turn to the land, upon the revision and
improvement of the original conditions, the settlements became
more popular; so that in 1898 seventy-three per cent. of the Jewish
population were exclusively devoted to agriculture, nineteen per
cent. varied the monotony of farming by the combination of trade,
while only eight per cent. were engaged entirely in commerce or
industry. This authority expresses the conviction that, as time goes
on, the Jew will develop into a successful agriculturist, provided he is
193
allowed to compete on fair terms with the Christian farmers.
An impartial examination of these contradictory opinions seems
to lead to the conclusion that the Jew, by nature and the education of
two thousand years, is too good a tradesman to make a good
husbandman. He is too keen-witted, too enterprising, too ambitious
to find adequate satisfaction in the slow and solitary culture of the
soil. In this respect the modern Jew is like the modern Greek. The
drudgery of field work repels him. The tedium of country life
depresses him. “No profit goes where no pleasure is ta’en.” It is in
the bustle of the market-place, where man meets man, where wit is
pitted against wit, and the intellect is sharpened on the whetstone of
competition, that his restless soul finds its highest gratification and
most congenial employment. He is a born townsman and a born
traveller. He has none of the stolid endurance of the earth-born.
Although he can excel in most pursuits, there is apparently one thing
beyond the reach of his versatility. He cannot dig.
The Russian peasant under normal conditions is the reverse of
all this: indolent, intemperate, improvident, unintelligent, and
unambitious, he lives entirely in the present, unhaunted by regrets of
the past, unharassed by plans for the future, and blissfully unaware
of the existence of any world beyond the world which his eye can
see—a very type of the earth-born, such as England knew him in the
glorious days of Chivalry and Wat Tyler. To such a race even less
formidable and foreign a competitor than the unbelieving Jew would
appear a monster of iniquity. And yet, there is abundant evidence to
prove that it is not the Russian peasant’s instinctive antipathy which
is primarily responsible for the sufferings of the Jew. The Russian
Jew, owing to his difference from the Russian Christian in race,
religion, temperament and mode of living, is by the latter regarded
with contempt and prejudice. These feelings, however, are not the
only causes of persecution. Formerly, as we have seen, the Jews
were reproached with excessive addiction to trade in liquor, whereby,
it was alleged, they ruined the peasantry in health, purse and morals.
This charge, whatever its value may have once been, can no longer
be brought against the Jews; for the Russian Government, since it
established a monopoly of spirits, has become the exclusive public-
house keeper in the Empire. The charge of usury still remains. But it
can easily be proved that in many districts the usurer is the powerful
Russian landlord and not the Jew. As a distinguished Russian
Liberal has appositely remarked, “the usurer must needs be a
wealthy person—a poor devil like the Jewish colonist settled amidst
the ‘Little Russian’ peasantry may possibly long for credit; he
194
certainly is not in a position to give it.”
According to the same authority, in “Little Russia” most of the
Jewish villagers are either shop-keepers and retail dealers, or
cobblers, tailors, smiths and the like. They form the commercial and
industrial element in the rural population, and their expulsion means
economic distress to the Russian husbandman, who, therefore, if left
to himself, is not unwilling to forgive the Jew the Old Crime, and to
forget his own prejudice against the foreigner and the follower of an
abhorred creed. But he is not left to himself. The peasant’s latent
antipathy is stirred to violence by the Nationalist agitators and
Government officials, who collaborate in endeavouring to stifle the
alien and revolutionary Jew through the brutality of the lower
classes; assisted by the artisans and mechanics who by the
persecution of the foreigner and the infidel seek the extinction of a
successful competitor. All the outbreaks of anti-Jewish hatred, from
1881 to this day, were organised by the police authorities in
accordance with a well-matured plan known as pogrom. The
procedure consists in deliberately inciting by word of mouth and
printed proclamations the dregs of society against the classes or
sects of the community obnoxious to the Government, and then,
when the work is done, suppressing the riot by the barbarous
methods which are so typical of Russian administration. The same
process is applied for the mutual extermination of others than the
Jews. It is a process based on the maxim divide et impera—the last
195
resource of an incompetent ruler.
1904–05 The disasters which befell the Russian arms in the
Far East, the discontent which they created at home,
and the danger of a revolutionary upheaval of all the oppressed
elements of the Empire induced the Czar’s Government to
reconsider its attitude towards the suffering subjects of the Czar. The
Austrian journal Pester Lloyd ventured to give some good advice to
that effect: “During the Napoleonic Wars the rulers captivated their
subjects by promising them liberty and constitutions. Whoever
wishes well to Russia must advise her to imitate the example.” In
accordance with that policy of tardy conciliation which circumstances
dictated, some Russian Liberals who had been banished for their
championship of the interests of the people were permitted to return
from exile, new Governors-General were appointed to Finland and
Poland, with instructions to pursue a more lenient policy than their
predecessors, a decree was issued ordering the Finnish Parliament
to assemble, its property was restored to the Armenian Church, and
other steps were taken showing that there was at least a desire to
diminish the sources of general discontent by conceding to necessity
what had hitherto been denied to justice.
The Jews, naturally enough, could not be forgotten. Besides the
danger which, in common with the other distressed and disaffected
subjects, they constitute to the Russian State, there were less
negative reasons for their propitiation. The Russian Government was
anxious to replenish the Treasury, emptied by the unfortunate war.
The Jewish financiers of the West constitute a great power, and that
power is known to entertain a deep and abiding hostility towards
Russia. Jewish capitalists the world over are actuated by a strong
desire to avenge the wrongs of their co-religionists, and they have
the means of gratifying that desire. Once more the Jew’s wealth has
proved potent enough to blunt the edge of prejudice. The Czar’s
Ministers endeavoured to pacify the Jewish financiers by making a
few trivial concessions to their persecuted brethren. M. De Plehve in
May 1904, acting in direct contradiction to the views expressed in
April, submitted to the Council of the Empire a Bill for repealing the
law under which Jews were forbidden to reside within fifty versts of
the Western frontier. It is true that the imputation that the Bill was
dictated by a Jewish banker as an indispensable condition for a loan
was strongly resented and repudiated in official circles. The
Russians, in proof of the spontaneous nature of the proposal,
declared that the Minister had, long before the necessity for loans
arose, been striving towards a relaxation of Jewish disabilities. This
statement has been partially corroborated by a distinguished Jewish
gentleman, who also affirms from personal knowledge that M. De
Plehve had for some time past endeavoured to alleviate the lot of the
Russian Jews by granting to them every liberty—save
196
emancipation. It was added that the process had naturally been
gradual, owing to Russian social conditions, that as early as May
1903 the Council of the Empire had passed a Bill of M. De Plehve’s
permitting the Jews to reside in 103 new places, and that 65 more
had been added in the autumn. At the same time a Commission had
been appointed to examine the laws relating to the Jews, especially
those engaged in productive labour. These statements may, of
course, be literally correct. But, until M. De Plehve’s utterances of
the previous April be proved to be a forgery, it is permissible to doubt
their accuracy in so far as the Minister’s good-will towards the Jews
is concerned.
M. De Plehve was in the State what M. Pobiedonostseff was in
the Church. The Minister of the Interior, like the Imperial Procurator
of the Holy Synod, represented and led for the last two decades or
more the party of reaction. By their Panslavist followers these two
men were described as the two pillars of the patriotic edifice of
Russian national life, which is raised on the ruins of the other
nationalities. By their opponents they were denounced as the two
ministering demons of Despotism and Dogmatism under their most
repulsive aspects. It was, therefore, with no surprise that the civilised
world heard on July 28, 1904, that M. De Plehve’s name had been
entered on the roll of Russian victims to that ruthless spirit of
revenge, whose cult their own ruthlessness helps to promote. He
died unlamented, as he had lived unloved; for a tyrant has no
friends. But that he was, as an individual, the incarnate fiend that his
enemies depicted, is a theory improbable in itself, and disproved by
those who came into contact with him. At the very worst he may
have been an ambitious man who, by pursuing the course which he
did, “sought to win the favour of the reactionary faction which at
present controls the Czar, and thus to fight his way towards the
197
highest power.” But a less severe estimate would, perhaps, be
nearer the true one. M. De Plehve was the champion of an ideal. He
honestly believed that in autocracy lay Russia’s salvation. Though
surrounded by dangers, and warned by the fate of his former master
Alexander II., of his predecessor Sipyaghin, of his instrument in the
oppression of Finland Bobrikoff, and of many of his colleagues and
subordinates, he unflinchingly persevered in the path which he had
marked out for himself. A man who imperils his own life in the pursuit
of a certain object is not the man to treat with tenderness those who
strive to thwart him. M. De Plehve’s object was to silence opposition
to the principles of autocracy. He pursued that object with the
unswerving firmness of a strong man, and crushed the obstacles
with the relentless conscientiousness of one who is absolutely
convinced of the righteousness of his cause. To such a man political
virtue means thoroughness combined with an utter lack of scruple
and a total disregard of all moral restraint in the service of the State
and the pursuit of its welfare. He was engaged in a game the stakes
of which were greatness or death. He lost it.
But though the dispassionate student can have nothing but pity
for a brave man perishing in the performance of what he deemed to
be his duty, he can also sympathise with those who hailed their arch-
enemy’s death with savage delight. They saw in M. De Plehve, not a
tragic character drawing upon himself the vengeance of an
inexorable Atê, but only the merciless Minister, the oppressor of
those who differed from him in their political ideals, the executioner
of men whose sole crime was their loyalty to the faith of their fathers
and the traditions of their race. As the lawyer Korobchevsky said
before the Court, in defence of the assassin: “The bomb which killed
the late Minister of the Interior was filled, not with dynamite, but with
the burning tears of the mothers, sisters, wives, and daughters of the
men whom he sent to the gallows, or to die slowly in prison or in
Siberia.”
Among the sufferers from M. De Plehve’s policy none had
greater reasons to hate him than the Jews. He regarded them, not
without cause, as the most energetic opponents to his autocratic
schemes, and his antipathy towards them on that account was
enhanced by his just appreciation of their abilities. Hence the
exceptional rigour in his treatment of them. M. De Plehve used to
refer to the revolutionary activity of the Jewish youth as a justification
for his own measures of coercion. That the Jews should be ready to
join, or even lead, in every attempt to overthrow the social and
political system under which they suffer so grievously is only natural.
Equally natural it is that the man to whom that system was
everything should have tried to suppress them. The Kishineff
massacre, as we have seen, was universally attributed to M. De
Plehve, and when the news of his assassination went forth few
surpassed the Jews in their exultation. The Jewish daily paper
Forward, of New York, immediately organised a meeting under the
auspices of the United Russian Revolutionists. The demonstrators
filled one of the largest halls in New York to overflowing, and at every
mention of M. De Plehve’s assassin, Sazonoff, burst into delirious
applause. He was praised as the worthy son of a noble cause; his
victim was described as the captured Port Arthur of Russian
despotism, and the interference of the police alone checked the
198
enthusiasm.
But, even granting the spontaneity and the disinterestedness of
the concessions which the Russian Government declared itself
prepared to make to the Jews, they would have only affected a
limited number of them. M. De Plehve’s plan at best was to bring
about the conciliation of the race by the absorption of the better class
of them and by the half-hearted application of some palliatives to the
grievances of the poorer, such as the enlargement of the area within
199
which they are confined, and permission to emigrate. The
experiment in assimilation, of which the Baltic provinces, Poland and
Finland, supplied a sample, was not one that commended itself to
the Jews. But, even if it succeeded, the vast majority of the race
would continue in their normal state of slavery. The same remark
applies to a remedial scheme drafted and adopted a few weeks later
by a departmental conference presided over by M. De Witte. The
Financial Minister’s association with the step lent colour to the
suspicion that this newly-awakened benevolence towards the Jew
was not foreign to Russia’s anxiety to procure fresh supplies of
money by the assistance of Jewish bankers abroad. However that
may be, the measures taken do not seem to have produced any
marked effect on the condition of the Russian Jews. That relief which
the wretched people could not gain from the Czar’s compassion,
they failed to obtain even from his fears.
On Aug. 4, 1904, anti-Semitic disturbances broke out at
Ostrowez, in the Government of Radom, where, according to private
statements, twenty Jews were killed; according to the Russian
authorities, one was seriously wounded, and died the following day,
while twenty-two persons were slightly injured. The same official
account ascribes the disturbances to the fact that a Jewish boy
struck a Christian—the blow, it is said, was exaggerated to murder,
and the mob set out to revenge themselves on the Jews. At
Partscheff also, in the Government of Siedlce, on the following day, it
was said that hundreds of Jews perished. The official version of the
occurrence stated that “the police dispersed, without using force, a
crowd of Jews who had assembled to hide a baptized Jew. In a
200
scuffle that ensued twenty persons were wounded.” On
September 4 and 5 anti-Semitic riots occurred at Smela, in the
Province of Kieff. This is the official account: “A Jewish shopkeeper
struck a peasant woman whom he suspected of having stolen some
cloth. Immediately a crowd collected, and plundered and sacked one
hundred houses and one hundred and fifty shops belonging to Jews.
That evening a party of sixty Jews attacked and beat the Christian
inhabitants. When the Jews began to fire on the latter the police
were summoned, who made use of their revolvers, wounding two
persons. The next evening several hundred railway employés, in
spite of the prohibition of the officials, went by train to Smela from
the adjacent station of Bobrinskaia. The rioting was renewed, and
the troops were summoned. The soldiers made use of their
weapons, and five persons were seriously wounded, while a large
201
number were slightly injured. Many arrests were made.” In
reading these official statements one must constantly bear in mind
the Russian Government’s desire to minimise a misfortune or a
misdeed which they dare not deny. A few days later, on September
11, on the occasion of the Jewish New Year, another anti-Jewish
disturbance occurred at Sosnowice, a town on the Siberian frontier.
A number of boys threw stones at some Jews who were engaged in
their annual ceremony, slightly injuring a child. This gave rise to a
rumour that the Jews had killed a child. Numbers of workmen
marched through the streets in the evening, smashing the window-
panes of Jewish dwelling-houses and of the synagogue. Several
Jews were injured by stones or knives. Doctors were afraid to render
202
assistance to the injured, owing to the attitude of the mob.
Hardly a month had passed since the last-mentioned event,
when a new outrage occurred in Mohileff. The following is a
condensed description of the occurrence by a well-qualified observer
who supports his statements by references to numerous witnesses:
A political demonstration in the town of Mohileff took place exactly
one week before the anti-Jewish riots. In Russia it is a crime for even
four men to come together in a private room without the knowledge
and permission of the police, and it is, therefore, a heinous atrocity
for a crowd to gather in the streets for a political purpose. Yet that is
what happened on October 15 in Mohileff. The Jewish workmen of
the place assembled by way of protesting against the cruelty of the
police, who, without a word of warning, had shot down harmless and
unarmed Hebrew working women and men; and against the unjust
condemnation to twelve years’ penal servitude of their comrades in
Yakootsk; and they recorded their wish that the war should stop. A
few policemen advanced against the workmen and tried to disperse
them, but were themselves scattered by the crowd. Then an
overwhelming police force marched against the malcontents, but to
their disgust found nobody. At this the Prefect of the Police of
Mohileff determined that, during the mobilisation which was to take
place in a few days, from Tsukermann’s synagogue to the railway
station the Jews should be thrashed until not a stone remained on
the pavement.
On October 22 the mobilisation of the Reserves was
promulgated. According to law, the vodka-shops should have been
shut on this occasion, and the Jewish population had earnestly
petitioned the authorities to insist on that precaution against
disorders being observed. But the shops were opened. To the
Jewish Reserve soldiers, who had assembled by order of the military
authorities, the Police Prefect addressed the following remarkable
words in the presence of a great crowd: “You contemptible Jews!
You are all foreign democrats! You ought to kiss the hands and feet
of the Christians! You have been beaten too little as yet! You must be
thrashed again!”
“We may pitch into the Jews and loot their shops,” the fellows
said; “there will be no punishment. The police allow it; hurrah!” The
subsequent attitude of the police amply bore out this expectation. At
three p.m. a band of petty local traders, not reserves, who had been
steadily gathering since morning, and were now led by striplings,
swept across the city, crying, “Pitch into the Jews!” and belabouring
all passing Jews with cudgels and stones. That day, however, the
matter did not go beyond the assaulting of individuals and the
breaking of windows. But none the less several persons were
grievously wounded and disfigured in the presence of the police,
who looked on approving.
The next morning, Sunday, October 23, the panic-stricken Jews
sent a deputation to the Police Prefect to petition for help and to
have the dram-shops closed. The Prefect consulted the Governor,
and then told the petitioners that he had been authorised to use his
own judgment. This answer was construed as a promise that the
taverns would not be opened. But shortly before noon notices were
posted up in the streets, signed by the Police Prefect himself,
informing the public that the reports to the effect that on the day
before there had been disorders in the town, in the course of which
several persons had been grievously wounded, were misleading.
What had really happened was “an ordinary, insignificant street
brawl.” This meant that the deeds of violence already done were but
the flowers, and that the fruits were yet to come.
And they came a few minutes later. On the stroke of twelve all
the brandy shops were opened, and already at one o’clock the
sanguinary battle began. Everything had been organised
beforehand. In all there were about one hundred houses and twenty-
five shops plundered and gutted. A crowd of about 150 men did the
business: sacked the jewellers’ shops, looted the wares, broke the
windows and doors of private houses which were tenanted by Jews,
and maltreated the people. They chose the poorest quarters of the
city for the scene of their depredations, but they advanced to the
centre of the town as well. The unfortunate Jews implored the police
to intervene and save them, but these were the replies they
received: “Be off to your democrats! Let them help you.” “That will
teach you to beat the police.” “You have not been thrashed enough
yet; when your throats are being cut we shall see.”
The few Jews who dared to defend themselves were arrested
and beaten by the police, who refused to lay a finger upon the
hooligans. One witness says: “None of the rioters were arrested; but
the police said to them, ‘Lads, that’s enough. Now you can go to
another place.’”
Why, it may be asked, did the police behave so cruelly and, one
may add, so treacherously towards the Jews? The motives are well
known, for the Police Prefect himself avowed them. Among the
witnesses whom the writer produces in proof of that statement there
is one whose words are well worth noting:
“The Police Prefect sent for me on October 24, and said: ‘You
Jews are being beaten on three grounds. In the first place, you
sneak off to America, and our Russians have to spill their blood
instead of you. Secondly, you are not devoted to the autocracy, and
you cry, “Down with the autocracy!” And in the third place, you have
no liking for the police, and you beat the members of the force.’”
During the height and heat of the riots a deputation from the
Jewish community called upon the Governor, Klingenberg, and
respectfully petitioned him to shield the Jews from the rioters. And
the Czar’s highest representative made answer: “That sort of thing
happens everywhere. I cannot set a soldier to guard every Jew.” And
as for the police, the Governor publicly praised their exemplary
conduct, and a money gratification was given them! Yet the police
were morally bound to save the Jews. Doubly bound, indeed, for,
besides their duty to the Czar, they were bribed by the Jews to
protect them. Bribed to do their duty!
The accusations made against the Jews, and made especially
for foreign consumption, are chiefly these: They sell vodka to the
reserve soldiers at exorbitant prices and thus incense these men,
who naturally avenge themselves by pillaging Jewish shops and
houses. They evade military service, and then Orthodox Russians
have to serve in lieu of the Jewish deserters. That, of course,
embitters the Christian recruits and explains their conduct. These
accusations are serious and would, of course, explain everything
except the conduct of the police—if they were true. But they are
false, and not false only, but impossible, as every Russian knows.
In the first place, it was not reserves who attacked the Jews, but
local loafers and hooligans. In the second place, the Jews could not
raise the price of alcohol, nor sell it at all, because it is the Imperial
Government which alone sells vodka, having a monopoly of it. In the
third place, the Christians have not to serve in the army in lieu of
Jews. The latter are bound to provide a certain number of reserves,
and for all of them who desert the Jewish community must find
members of the same faith. In like manner, Russians must take the
place of fugitive Russians, not of Jews.
Lastly, there remains the charge of desertion. Is it true? Yes,
quite true; but then it is true of Christians and Jews alike, for the war
was very unpopular. The interesting part of the story is that the
Christians shirked their duty far more extensively and successfully
than the Jews. That can be proved by figures, and the following data
are not likely to be challenged by anyone. Before the reserves were
called out at all the total of Jews in the Manchurian army was roughly
thirty thousand men. In all probability it exceeded that number, the
bulk of them serving in Siberian regiments. It is as well, however, to
state the case moderately. Now, since the mobilisation of the
reserves (in the districts where the Jewish element is largely
represented, such as Vilna, Odessa, Warsaw, Kieff), the active
Russian army had no less than fifty thousand soldiers of the Jewish
faith. And that is an enormous percentage. Indeed, so abnormally
great is that percentage of Jews that, if the other nationalities who
acknowledge the sway of the Czar, contributed a proportionate

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M Finance 3rd Edition Cornett Solutions

CHAPTER 7 – VALUING BONDS

LG2 3. Explain how mortgage-backed securities work.

Corporate zero coupon bond maturing in 10 years: 0.00 × $1,000 = $0

December 1, 2096 minus December 2, 2015 = 81 years

Principal + Call premium = $1,000 + 0.06 × $1,000 = $1,060

Principal + Call premium = $1,000 + 0.055 × $1,000 = $1,055

Par value = 210.7 / 185.4 × $1,000 = $1,136.46

Par value = 206.8 / 180.5 × $1,000 = $1,145.71

Treasury note at 97:27: (97 + 27/32)% × $1,000 = 0.9784375 × $1,000 = $978.44

Treasury note at 106:14: (106 + 14/32)% × $1,000 = 1.064375 × $1,000 = $1,064.38

Use semiannual compounding:

Use semiannual compounding:

3.8% / 102.08% = 0.0372 = 3.72%

5.2% / 96.78% = 0.05373 = 5.37%

Use equation 7.4:

Muni yield 3.5%

Use equation 7.4:

Muni yield 2.9%

Trump Casino bond with yield of 8.76 percent

Treasury bond with yield of 4.65 percent

Gain = End of year value – Beginning of year value =

Gain = End of year value – Beginning of year value =

or TVM calculator: N = 20, I = 3.5, PMT = 28, FV = 1000; CPT PV = -900.51

or TVM calculator: N = 44, I = 3.25, PMT = 28.50, FV = 1000; CPT PV = -907.05

Compute the current bond price:

or TVM calculator: N = 20, I = 3.25, PMT = 28.75, FV = 1000; CPT PV = -945.48

Now compute the price in one year:

or TVM calculator: N = 18, I = 3.0 PMT = 28.75, FV = 1000; CPT PV = -$982.81

So, the dollar change in price is:

$996.53 − $945.48 = $37.33

Compute the current bond price:

or TVM calculator: N = 28, I = 3.6, PMT = 32.50, FV = 1000; CPT PV = -938.89

Now compute the price in one year:

or TVM calculator: N = 26, I = 3.4, PMT = 32.50, FV = 1000; CPT PV = -974.38

So, the dollar change in price is:

TVM calculator: N = 12, PV = -1,135.25, PMT = 33.75, FV = 1067.50; CPT I = 2.541%

TVM calculator: N = 8, PV = -1,075.50, PMT = 26.25, FV = 1,052.50; CPT I = 2.193% YTC =

First determine the ETY:

Muni yield 4.5%

First determine the ETY:

Muni yield 4.5%

Capital gain = End of year value – Beginning of year value =

Gain = End of year value – Beginning of year value =

Compute the current bond price:

or TVM calculator: N = 44, I = 2.75, PMT = 31.25, FV = 1,000; CPT PV = -1,095.03

Now compute the price in one year:

or TVM calculator: N = 42, I = 3.0, PMT = 31.25, FV = 1,000; CPT PV = -1,029.63

Total return = Dollar change in price + Interest payments:

Compute the current bond price:

or TVM calculator: N = 26, I = 3.125, PMT = 37.50, FV = 1000; CPT PV = -1,110.14

Now compute the price in one year:

or TVM calculator: N = 24, I = 3.5, PMT = 37.50, FV = 1000; CPT PV = -1,040.15

Total return = Dollar change in price + Interest payments:

The percentage return is: $5.01 / $1,110.14 = 0.45%

Current yield = (0.025 × $5,000) / (0.9845 × $5,000) = 2.50% / 98.45% = 2.54%

TVM calculator: N = 24, PV = -4,922.50, PMT = 62.50, FV = 5000; CPT I = 1.3258%

Muni yield 2.65%

TVM calculator: N = 8, PV = -4,922.50, PMT = 62.50, FV = 5125; CPT I = 1.753%

Current yield = (0.0385 × $5,000) / (1.0320 × $5,000) = 3.85% / 103.20% = 3.73%

Muni yield 3.61%

TVM calculator: N = 16, PV = -5,160, PMT = 96.25, FV = 5192.50; CPT I = 1.90%