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CHAPTER 7
INTEREST RATES AND BOND
VALUATION
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require
multiple steps. Due to space and readability constraints, when these intermediate steps are
included in this solutions manual, rounding may appear to have occurred. However, the final
answer for each problem is found without rounding during any step in the problem.
4.
Here we need to find the YTM of a bond. The equation for the bond price is:
P = $934 = $90(PVIFA
R%
,9
) + $1,000(PVIF
R
%,9
)
Notice the equation cannot be solved directly for
R
. Using a spreadsheet, a financial
calculator, or trial and error, we find:
R
= YTM = 10.15%
If you are using trial and error to find the YTM of the bond, you might be wondering
how to pick an interest rate to start the process. First, we know the YTM has to be higher
than the coupon rate since the bond is a discount bond. That still leaves a lot of interest
rates to check. One way to get a starting point is to use the following equation, which
will give you an approximation of the YTM:
Approximate YTM = [Annual interest payment + (Price difference from par / Years to
maturity)] /
[(Price + Par value) / 2]
Solving for this problem, we get:
Approximate YTM = [$90 + ($64 / 9] / [($934 + 1,000) / 2] = 10.04%
This is not the exact YTM, but it is close, and it will give you a place to start.
5.
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 Spring '08
 LAYISH
 Corporate Finance, Interest, Interest Rate, Valuation

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