27 Jul BA/350 WEEK 6 PROBLEM 5.1 ,5.4, 5.9, 5.13
BA/350 Week 6 Problem 5.1 ,5.4,
5.9, 5.13 Solution
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 in 8%. The bonds have a yield to maturity of 9%. What is the
current market price of these bonds?
5.4
determinant of interest rates
The real
risk-free rate of interest is 4%. Inflation is expected to be 2% this year and
4% during the next 2 years. Assume that the maturity risk premium is zero. What
is the yield on 2-year Treasury securities? What is the yield on 3 year
Treasury securities?
5.9 bond
valuation and interest rare risk T
he Garraty
Company has two bond issues outstanding. Both bonds pay $100 annual interest
plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a
maturity of 1 year. – What will be the value of each of these bonds when the
going rate of interest is (1) 5%, (2) 8%, and (3) 12%? Assume that there is
only one more interest payment to be made on bond S. – Why does the longer-term
(15 year) bond fluctuate more when interest rates change than does the short
term bond (1 year)?
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?
BA350
Problem 5.1 ,5.4, 5.9, 5.13
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