Chapter 5: Bonds, Bond Valuation, and Interest Rates

(5–1) Bond Valuation with Annual Payments

Jackson Corporation’s bonds have N=12 years remaining to maturity. Interest is paid annually, the bonds have a FV=$1,000 par value, and the coupon interest rate is PMT=8%. The bonds have a yield to maturity of I=9%. What is the current market price of these bonds? $928.39

Calculator solution: Input: N = 12, I = 9, PMT = 80, FV = 1000, Solve for PV = $928.39

(5–2) Yield to Maturity for Annual Payments

Wilson Wonders’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 10%. The bonds sell at a price of $850. What is their yield to maturity? .12475 or 12.48%

Calculator solution: Input N = 12, PV = -850, PMT = 100, FV = 1000, and solve for I = rd = %.

Or

Yield to maturity (financial) calculator.

| Sources: http://www.moneychimp.com/calculator/bond_yield_calculator.htm |

(5–3) Current Yield for Annual Payments

Heath Foods’s bonds has 7 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their current yield? 8.55%

Calculator solution: N=7,I/Y=8, PMT=90, fv=1000,CPT PV= 1052.06 current yield = coupon/current price

Thus, current yield=90/1052.06=8.55% years to maturity | 7 | face value of | $1,000 | yield to maturity of | 8% | coupon rate | 9% |

(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? 0.3% r2 | = | r* | + | IP | + | DRP | + | LP | + | MRP | 6.3% | = | 3% | + | 3% | + | 0 | + | 0 | + | MRP |

6.3% = 6% + MRP

MRP = 6.3 – 6

MRP = 0.3%

(5–7) Bond Valuation with Semiannual Payments

Renfro Rentals has issued bonds that have