3. Popie Drink Corp issued 12 year bonds 2 years ago at a coupon rate of 8.4 per

Question

3. Popie Drink Corp issued 12 year bonds 2 years ago at a coupon rate of 8.4 percent. The bonds make semi-annual payments. If these bonds currently sell for 105 percent of par value, what is the YTM? Assume the par value of a bond is $1,000. Do not round intermediate calculations and round your final answer to 2 decimal places. Treasury bills are currently paying 7 percent and the inflation rate is 3.8 percent. What is the approximate real rate of interest? What is the exact real rate? Round your answer to 2 decimal places. 4.

Explanation / Answer

3)

Years to maturity = 12 - 2 = 10

Coupon amount = 1000*8.4% = 84

Redemption amount = 1000*105% = 1050

YTM = [84 + {(1050 - 1000)/10}] / [(1050+1000)/2

= (84 + 5)/1025 = (89/1025) *100 = 8.68%

4)

Approximate real rate of interest = Treasury Bill interest rate - Inflation rate = 7% - 3.8% = 3.2%

Exact real rate =[(Treasury Bill interest rate /Inflation rate) - 1] *100 = [(1.07/1.038) - 1] *100 = 3.08%

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