ch5 - Chapter 5 5-1 The rate of return is(1000/300)1/10 or...

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Chapter 5 5-1 The rate of return is (1000/300) 1/10 or 12.79% 5-2 Value of 15-year corporate bond; 9% coupon rate; 8 % market interest rate Assuming coupons are paid semi-annually, Value of Bond = 45*(1-1.04 -30 )/.04+1,000/1.04 30 = \$1,086.46 If market interest rates increase to 10%, Value of Bond = 45*(1-1.05 -30 )/.05+1,000/1.05 30 = \$923.14 The bonds will trade at par only if the market interest rate = coupon rate. Alternatively, you could consider the compounding effect in the market interest rate – the six-month interest rate will be less than 4%. In that case, the value of the bonds would be as follows: Six-month rate = (1.08) 1/2 - = .0392 Value of Bond = 45*(1-1.0392 -30 )/.0392+1,000/1.08 15 = \$1,101 5-3 If the NV Technologies bond is trading at par, its yield is equal to its coupon rate of 8%. If GEV Technologies has the same rating, it should have a similar yield. Hence, we can write: n n 04 . 1 100 ) 04 . 1 1 1 ( 04 . 75 . 3 95 + - = , where n/2 is the maturity in years of the GEV bond. Solving, we find n = 41; hence the maturity is 20.5 years. 5-4 The yield on the bond is 6.5 + 0.5 = 7%.

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