Fin515 Homework Week 3

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)^m

F=1000, C= 1000, r=.08. i=.09, n=12

Bond price= 1000*.08*(1-1.09^-12)/.09+1000*1.09^-12= 928.39

Bond price= 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?

Current price= 850

Par value= 1000

Coupon rate= 10%

Years to maturity= 12

Yield to maturity= annual interest+(par value-market price)/(# of years to maturity)/(par value + market price)/2

Yield to maturity= 12.47%

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

MRP= 6.3-6

Maturity risk premium= 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= 1000

PMT= 50

N= 16

R= 4.25%

PV = 50*11.44+1000*5138

Present Value= 1085.80

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 bond has a current yield of 8.21%. What is the bond’s yield to maturity?

Current yield = annual interest/current price

0.0821= 80/PV

PV= 80/0.0821= 974.42

N= 5, PMT= 80. FV= 1000, PV= 974.42

YTM= [80+(1000-974.42)/5]/(1000+974.42)/2

Bonds yield to maturity= 8.63%...