Ch14_623S-2.pdf - Solutions to Chapter 14 Problems 6 a Effective annual rate for 3-month T-bill 4 100,000 1 1.02412 4 1 0.100 10.0 97,645 b Effective

Ch14_623S-2.pdf - Solutions to Chapter 14 Problems 6 a...

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- 1 - Solutions to Chapter 14 Problems 6. a. Effective annual rate for 3-month T-bill: % 0 . 10 100 . 0 1 02412 . 1 1 645 , 97 000 , 100 4 4 b. Effective annual interest rate for coupon bond paying 5% semiannually: (1.05. 2 − 1) = 0.1025 or 10.25% Therefore, the coupon bond has the higher effective annual interest rate. 7. The effective annual yield on the semiannual coupon bonds is 8.16%. If the annual coupon bonds are to sell at par they must offer the same yield, which requires an annual coupon rate of 8.16%. 9. Yield to maturity: Using a financial calculator, enter the following: n = 3; PV = 953.10; FV = 1000; PMT = 80; COMP i This results in: YTM = 9.88% Realized compound yield: First, find the future value (FV) of reinvested coupons and principal: FV = ($80 1.10 1.12) + ($80 1.12) + $1,080 = $1,268.16 Then find the rate ( y realized ) that makes the FV of the purchase price equal to $1,268.16: $953.10 (1 + y realized ) 3 = $1,268.16 y realized = 9.99% or approximately 10% Or, using a financial calculator, enter the following: N = 3; PV = 953.10; FV = 1,268.16; PMT = 0; COMP I. Answer is 9.99%. 10. a. Zero coupon 8% coupon 10% coupon Current prices $463.19 $1,000.00 $1,134.20 b. Price 1 year from now $500.25 $1,000.00 $1,124.94 c. Price increase $ 37.06 $ 0.00 − $ 9.26 Coupon income $ 0.00 $ 80.00 $100.00 Pretax income $ 37.06 $ 80.00 $ 90.74 Pretax rate of return 8.00% 8.00% 8.00%

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