Problems (pp. 210-211)
5-1 Bond Valuation with Annual Payments
Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds?
P = F*r*[1 -(1+i)^-n]/i + C*(1+i)^-n, where
F = par value
C = maturity value
r = coupon rate per coupon payment period
i = effective interest rate per coupon payment period
n = number of coupon payments remaining
F = 1000. Since we are not given the maturity value, we can assume that it is the
same as the par value. So, C = 1000.
r = .08
i = .09
n = 12
The bond price is 1000*.08 * (1 - 1.09^-12)/.09 + 1000*1.09^-12 = $928.39
5-2 YTM for Annual Payments
Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annu- ally, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity?
TTM = 12 years Par = $1,000
Using Finance Functions on 12c: n = 12 PMT = 100 PV = -850 i = 12.4751%
C = 10% ($100) Price = $850 YTM = solve
PMT = 100 i = solve
Yield to Maturity = 12.48%
5-6 Maturity Risk Premium
The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security? r = r* +IP+DRP+LP+MRP
6.2=%3% + 3% + 0 + 0 + MRP
5-7 Bond Valuation with Semi-Annual Payments
Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?
FV 1,000 PMT 50 N 16 R 4.25% Present Value = $1,085.80
5-13 Yield to Maturity and Current Yield
You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The...
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