(5-1). Bond Valuation with Annual Payments Jackson Corporation’s bonds have 12 y
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Question
(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 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 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 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). Bond Valuation with Semiannual Payments
Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?
(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?
Explanation / Answer
Answer to Question 5-1.
Face Value = $1,000
Annual Coupon Rate = 8%
Annual Coupon = 8% * $1,000
Annual Coupon = $80
Time to Maturity = 12 years
Annual YTM = 9%
Price of Bond = $80 * PVIFA(9%, 12) + $1,000 * PVIF(9%, 12)
Price of Bond = $80 * (1 - (1/1.09)^12) / 0.09 + $1,000 / 1.09^12
Price of Bond = $928.39
Answer to Question 5-2.
Face Value = $1,000
Current Price = $850
Annual Coupon Rate = 10%
Annual Coupon = 10% * $1,000
Annual Coupon = $100
Time to Maturity = 12 years
Let Annual YTM be i%
$850 = $100 * PVIFA(i%, 12) + $1,000 * PVIF(i%, 12)
Using financial calculator:
N = 12
PV = -850
PMT = 100
FV = 1000
I = 12.48%
Annual YTM = 12.48%
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