Fi515 Homework Week 3

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Submitted By awesom59
Words 771
Pages 4
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*(i^-n)

F = par value = 1000
C = maturity value = 1000 r = coupon rate per coupon payment period = .08 i = effective interest rate per coupon payment period = .09 n = number of coupon payments remaining = 12

=1000*0.08*[1-(1+1.09)^-12]/0.09+1000*(1.09^-12)
= 928.3927
= $928.39

5-2
Yield to Maturity for Annual payments
Wilson Wonder’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?

TTM = 12 years
Par = $1000

n = 12; PMT = 100; PV = -850; i = 12.4751% c = 10% (100) price = $850 YTM =

PMT = 100 i = solve
Yield to Maturity = 12.48%

Time to maturity = 12 yrs.
Par value = $1,000
Coupon interest rate = 10%
Price of bond = $850
Value of bond = t=1nParvalue*coupon interest rate1+YTMt+Par value1+YTMn

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+MRP
6.3 = 3+3+MRP
6.4 = 6 + MRP
MRP = 6.3 – 6
MRP = 0.3%

5-7
Bond Valuation with Semiannual 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

$1,085.80

5-13
Yield to Maturity and Current Yield
You just…...

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