W5A2 a)Bond Valuation with Annual Payments Jackson Corporation\'s bonds have 5 y

Question

W5A2

a)Bond Valuation with Annual Payments

Jackson Corporation's bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 7.5%. The bonds have a yield to maturity of 12%. What is the current market price of these bonds? Round your answer to the nearest cent.

b)Current Yield for Annual Payments

Heath Foods's bonds have 22 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their current yield? Round your answer to two decimal places.

Determinant of Interest Rates

The real risk-free rate of interest is 3%. Inflation is expected to be 1% 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? Round your answer to two decimal places.
  %

What is the yield on 3-year Treasury securities? Round your answer to two decimal places.
  %

Explanation / Answer

a. In excel, PV = PV(12%, 5, 75, 1000) = $837.79 is the price of the bond

b The current yield to maturity is 8%. Based on that we calculate the current price of the bond. As shown above, using PV formula in excel, we get PV = $1,102.01.

In order to calculate yield on the bond, we need to know the current price of the bond, which is not given. Based on the information available, we can only calculate the price of the bond.

c. Nominal Interest Rate = Real Interest Rate + Inflation

For 2-year securities, Nominal Inflation (Annualized) = (1.01 x 1.04)^(0.5) - 1 = 2.49%; Yield = 1.03 x 1.0249 - 1 = 5.56%

For 3-year securities, Nominal Inflation (Annualized) = (1.01 x 1.04 x 1.04)^(1/3) - 1 = 2.99%; Yield = 1.03 x 1.0299 - 1 = 6.08%

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