Explain MM Proposition II Under Conditions of Corporate Taxes and Risk-Free

question 118

Essay

Explain MM Proposition II under conditions of corporate taxes and risk-free debt.How does the analysis change when debt can be risky?

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Definitions:

Convexity

A measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes.

Modified Duration

A measure that estimates the price sensitivity of a bond to a one percent change in interest rates, adjusting for the changing yield to maturity.

Yield To Maturity

The total return anticipated on a bond if the bond is held until it matures.

Duration

A measure of the sensitivity of the price of a bond or other fixed-income investment to changes in interest rates, typically expressed in years.