# Fi 515 Week 3 Homework

753 Words4 Pages
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)^-n, where 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 The bond price is 1000*.08 * (1 - 1.09^-12)/.09 + 1000*1.09^-12 = \$928.39 5-2 YTM 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? Given: TTM = 12 years Par = \$1,000 n = 12 PMT = 100 PV = -850 i = 12.4751% C = 10% (\$100) Price = \$850 PMT = 100 Yield to Maturity = 12.48% 5-6 Maturity Risk Premiums 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+DRP+LP+MRP 6.2=%3% + 3% + 0 + 0 + MRP 5-7 Bond Valuation with Semi-Annual 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 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 COUPON ÷ PV 0.0821 = 80 ÷ PV PV = 80 ÷ 0.0821 = 974.42 N = 5;