1. Seven years ago, Goodwynn & Wolf Incorporated sold a 20-year bond issue with

Question

1. Seven years ago, Goodwynn & Wolf Incorporated sold a 20-year bond issue with a 14% annual coupon rate and a 9% call premium. Today, G&W called the bonds. The bonds originally were sold at their face value of $1,000. Compute the realized rate of return for investors who purchased the bonds when they were issued and who surrender them today in exchange for the call price. Round your answer to two decimal places.

2.You just purchased a bond that matures in 4 years. The bond has a face value of $1,000 and has an 9% annual coupon. The bond has a current yield of 7.63%. What is the bond's yield to maturity? Round your answer to two decimal places.

3.Absalom Motors's 8% coupon rate, semiannual payment, $1,000 par value bonds that mature in 30 years are callable 6 years from now at a price of $1,025. The bonds sell at a price of $1,254.87, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of the nominal interest rate on new bonds? Round your answer to two decimal places.

Explanation / Answer

1. PV = 1000; N = 7; PMT = 140; FV = 1090

let realized rate of return  = r

1000 = 140/(1+r) + 140/(1+r)^2 + 140/(1+r)^3 + 140/(1+r)^4 + 140/(1+r)^5 + 140/(1+r)^6 + 140/(1+r)^7 +1090/(1+r)^7

r= 14.82%

2. Price = 9%*1000/7.63%=1179.554

coupon = 9%*1000 =90

1179.554 = 90/(1+YTM) + 90/(1+YTM)^2 + 90/(1+YTM)^3 + 1090/(1+YTM)^4

bond's yield to maturity= 4.05%

3. Coupon payment = 8%*1000/2= 40

let nominal interest rate on new bonds = r

number of payments = 30*2= 60

$1,254.87 = 40/(1+r/2) + 40/(1+r/2)^2 + 40/(1+r/2)^3 + 40/(1+r/2)^4..............1040/(1+r/2)^60

r= 6.13%

nominal interest rate on new bonds = 6.13%

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