Gitman_286618_IM_ch06
1) The current interest rate for a 5 year Treasury note is .75%. If the current inflation rate is .1% what is the real rate. .65%
2) The current rate on a 30 year Treasury bond is 3.2%. If the real rate is approximately 2%, what is the inflation rate. 1.2%
3) If a corporate AAA rated bond yields 5.6%, what is the risk premium given the 30 year treasury rate in question 2? 2.4%
4) P6-13 Valuation (time value worksheets) (5)
|Cash flow |Discount rate |Value |
|0 |10% |4973.70 |
|2000 | | |
|2000 | | |
|2000 | | |
|0 |8% |1,440.05 |
|1 250 | | |
|2 350 | | |
|3 450 | | |
|4 750 | | |
|1,440.050 |7.75% |618.00 |
|1 – 19 0 | | |
|20 2,750 | | |
5) Business finance / bond valuation (5) Bond Valuation spreadsheet
|Bond |Maturity |Coupon |Required return |Value |
|A |10 |5 |7 |$859.53 |
|B |25 |6.5 |4.5 |$1,296.56 |
|C |30 |3.75 |5 |$807.84 |
|D |95 |1.75 |8 |$219.27 |
|E |100 |0 |6.5 |$1.84 |
6) Complete the following table:
|Bond |Maturity |Coupon |Price |YTM |
|A |12 |5 |$987 |5.15% |
|B |20 |6.5 |$1,016 |6.36% |
|C |15 |3.75 |$1,000 |3.75% |
|D |40 |1.75 |$378 |5.76% |
|E |100 |0 |$176 |1.75% |
The following are 2 points each (14)
7) What is the nominal rate of return if the real rate is 3%, the inflation premium is 6%, and the risk premium is 0??
9%
8) What type of asset is in question 7?
Risk-free
9) A corporation is issuing a AA rated bond. The average return for a AA bond is 7%. The coupon rate is 9% with a 25 year maturity. What is the value of this bond?
$1,233.07
10) If you can buy the bond in question 9 now at 1100, what would your YTM be?
8.06%
11) If the company issuing the bond in question 9 undergoes some bad times and in 5 years the rating drops to BB, what will the value be in 5 years if the yield on BB bonds at that time is 10%?
$914.86
12) If you waited and then purchased the above bond in 5 years for 850, what would your YTM be then?
10.87%
13) The bond in question 9 is callable in 10 years. The price is currently $1,100. If the call
premium is the par value and one years interest what is the yield to call?
8.12%
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