HMW Chp5
Problems
(5-5) A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premium on the corporate bond?
Maturity = 10 years rtbond = 6% rcbond = 9% liquidity premium = 0.5% rd= r* + IP + DRP + LP + MRP
Default Risk Premium (DRP) = 9% - 6% + 0.5% = 2.5%
(5-7) 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 = (10%*$1,000)/2 n= 16 = 8*2 = 16 r =4.25 % = 8.5% / 2
= $1,085.80
(5-12) A 10-year, 12% semiannual coupon bond with a par value of $1,000 may be called in
4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.)
a. What is the bond’s yield to maturity? n = 20 = 10*2
PMT = (12% * $1,000)/2 = 60
FV = $1,000
PV = -$1,100
I/Y = 5.1849 (semi annual)
= 5. 1849*2 (annual)
YTM =10,37%
b. What is the bond’s current yield?
Ann. Coupon = $120
Price = $1.100
Current yield = 120 / 1.100 = 10,91%
c. What is the bond’s capital gain or loss yield?
YTM = 10,37 %
Current yield = 10,91 %
Capital gain / loss yield = 10,37 % - 10,91 % = -0,54%
d. What is the bond’s yield to call? n = 4*2 = 8
PMT= (12%*$1,000)/2 = $60
PV = - $1,100
FV = $1,060
YTC = 10,15% an advantage to calling the bonds, rather than seeing them to maturity.
(5-5) A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premium on the corporate bond?
Maturity = 10 years rtbond = 6% rcbond = 9% liquidity premium = 0.5% rd= r* + IP + DRP + LP + MRP
Default Risk Premium (DRP) = 9% - 6% + 0.5% = 2.5%
(5-7) 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 = (10%*$1,000)/2 n= 16 = 8*2 = 16 r =4.25 % = 8.5% / 2
= $1,085.80
(5-12) A 10-year, 12% semiannual coupon bond with a par value of $1,000 may be called in
4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.)
a. What is the bond’s yield to maturity? n = 20 = 10*2
PMT = (12% * $1,000)/2 = 60
FV = $1,000
PV = -$1,100
I/Y = 5.1849 (semi annual)
= 5. 1849*2 (annual)
YTM =10,37%
b. What is the bond’s current yield?
Ann. Coupon = $120
Price = $1.100
Current yield = 120 / 1.100 = 10,91%
c. What is the bond’s capital gain or loss yield?
YTM = 10,37 %
Current yield = 10,91 %
Capital gain / loss yield = 10,37 % - 10,91 % = -0,54%
d. What is the bond’s yield to call? n = 4*2 = 8
PMT= (12%*$1,000)/2 = $60
PV = - $1,100
FV = $1,060
YTC = 10,15% an advantage to calling the bonds, rather than seeing them to maturity.