B2StudyPack2010 - F370 B2 Study Pack - Page 1 2010 Dan...

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F370 B2 Study Pack -- Page 1 © 2010 Dan Greiner Study Pack for the B2 Lecture Vocabulary for the B2 Lecture Yield-to-Maturity, Implied Return or Implied Yield Competitive Yield, The Yield Curve Price Risk Maturity Risk and Risk Premiums (also called Interest-Rate Risk) Selling at Par A Default Default Risk and Risk Premiums, Distressed Firm The Workout Process or Game Bond Ratings Collateral, Covenants, Seniority Formulas for the B2 Lecture r T,x = r f + r mp,x r C,x = r T,x + r dp r C,x = r f + r mp,x + r dp
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F370 B2 Study Pack -- Page 2 © 2010 Dan Greiner Problem Set for B2 Lecture Treasury Bonds 1. Consider the following table of data collected for a sample of Treasury Debt. Calculate the yield-to-maturity and maturity risk premium (right-most columns) for each of these securities. Assume that the Face Value of all of these debt contracts is $1,000. Security Remaining Term (Years) Market Price Coupon Rate YTM Maturity- Risk Premium Bill 1 $973.24 0% Note 3 $1,008.93 4.0% Note 5 $956.53 3.5% Bond 10 $1,159.61 7.1% Bond 20 $949.47 5.0% Bond 30 $1,031.35 5.9% 2. Consider the 20-year Treasury bond in the table above. Suppose that you buy it today for its market price of $949.47. If you hold the bond for one year and the yield curve does not change at all over that year, then how much return will you have experienced when you sell the bond next year? 3. Suppose that you observe a 1-year T-Bill selling for $962.46 and a 15-year T-Bond selling for $932.46. If the T-Bond has a coupon rate of 5.4%, then what is the implied premium for maturity risk r mp,15 on the 15-year T-Bond? 4. Two treasury bonds both have a face value of $1,000 and a coupon rate of 10%. Bond A has 2 years remaining before it matures and has a current yield to maturity of 7.67%. Bond B has 12 years remaining before it matures and a current yield to maturity of
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This note was uploaded on 11/05/2010 for the course BUS F370 taught by Professor Tom during the Spring '10 term at Indiana Institute of Technology.

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B2StudyPack2010 - F370 B2 Study Pack - Page 1 2010 Dan...

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