Chapter 5 & 6 Homework Fin 515

FI 515 Week 3 Homework

Chapter 5

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?

$928.39

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

Therefore, the bond price is 1000*.08 * (1 - 1.09^-12)/.09 + 1000*1.09^-12 = $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?

12.48%

N= 12, I=?, PV= -$850, PMT= 100 (thats 1000 * 10%), & FV= $1000

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?

6.3% - 6%= 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= $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?

8.65%

Chapter 6

Q 6.6 If a company’s beta were to double, would its expected return double?

6.1 Portfolio Beta

An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what...