CLASS / COURSE: Finance

QUESTION DESCRIPTION:

Assignment Three

 

1. Yest Corporation's bonds have a 15-year maturity, a 7% semiannual coupon, and a par value of $1,000.  The market interest rate (r) is 6%, based on semiannual compounding.  What is the bond’s price?

 

2. A 20-year, $1,000 par value bond has a 9% annual coupon.  The bond currently sells for $925.  If the yield to maturity remains at its current rate, what will the price be 5 years from now?

 

3. Meade Corporation has 6-year, $1,000 par value bonds that have a yield to maturity of 8.5% and a 10% annual coupon rate.  What are the current and capital gains yields on the bonds for this year?

 

4. A 15-year, 10% semiannual coupon bond has a par value of $1,000.  The bond has a price of $1,050.    What is the bond’s nominal yield to maturity?

 

5. Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, a maturity premium of 0.08% per year to maturity applies, i.e., MRP = 0.08%*t, where t is the years to maturity.  Suppose also that a liquidity premium of 0.5% and a default risk premiumof 0.85% applies to A-rated corporate bonds.  How much higher would the rate of return be on a 10-year A-rated corporate bond than on a 5-year Treasury bond? 

 

6. (Extra Credit). Skylab Technologies issued 10-year bonds yesterday at their par value of $1,000. These bonds pay $60 in interest every six months, and their price has remained at the $1,000 issue price.  Skylab's CFO has determined that the firm needs an additional $2,000,000, and has decided to issue 10-year, $1,000 par value bonds that pay only $40 in interest every six months.  If both bonds are to provide investors with the same yield, how many new bonds must Skylab issue to raise $2,000,000?  (Ignore the day or two difference between the bonds' issue dates)

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SUBJECTS / CATEGORIES:
1. Finance
2. Financial Management
3. Accounting
4. Corporate Finance