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9/23/12

FI515_Homework3

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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%. p. What is the current market price of these bonds?

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VB = INT*r*[1 -(1+rd)-n]/i + M*(1+rd)-n INT = par value M= maturity value r = coupon rate per coupon payment period rd= effective interest rate per coupon payment period n = number of coupon payments remaining INT = 1000. And, since we are not given the maturity value, we can assume that it is the same as the par value. Therefore, M = 1000. r = .08 i = .09 n = 12 Market price of the bonds=1000*.08 * (1 - 1.09-12)/.09 + 1000*1.09-12 Market price of the bonds = \$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?

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Time to maturity = 12 years

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9/23/12

FI515_Homework3

Time to maturity = 12 years...