11 May Question5-1 Bond Valuation with Annual payments
Question
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?
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?
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?
5.7
The problem asks you to find the price of a bond, given the following facts:
5.13
The problem asks you to solve for the YTM, given the following facts:
N = 5, PMT = 80, and FV = 1000. In order to solve for I/YR we need PV.
However, you are also given that the current yield is equal to 8.21%. Given this information, we can
find PV.
6.6
According to the Security Market Line (SML) equation, an increase in beta will increase a company’s
expected return by an amount equal to the market risk premium times the change in beta. For example,
assume that the risk-free rate is 6 percent, and the market risk premium is 5 percent. If the company’s
beta doubles from 0.8 to 1.6 its expected return increases from 10 percent to 14 percent. Therefore, in
general, a company’s expected return will not double when its beta doubles.
ri = rRF +(rM -rRF)bi = rRF +( rpM) bi
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