Unit_5_Assignment

# Unit_5_Assignment - 1 Question Rollincoast Incorporated...

This preview shows pages 1–8. Sign up to view the full content.

1. Question: Rollincoast Incorporated issued BBB bonds two years ago that provided a yield to maturity of 11.5%. Long-term risk-free government bonds were yielding 8.7% at that time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk-free long-term government bonds are currently yielding 7.8%, then at what rate should Rollincoast expect to issue new bonds?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Your Answer: 7.8 % 8.7 % 9.2 % C ORR ECT ANS WE R 10.2 % IN CO RR ECT
Instructor Explanation: Calculate the previous risk premium, RP BBB , and new RP BBB : RP BBB = 11.5% - 8.7% = 2.8%. New RP BBB = 2.8%/2 = 1.4%. Calculate new YTM on BBB bonds: YTM BBB = 7.8% + 1.4% = 9.2%. Points Received: 0 of 4 2. Question: A 10-year, \$1,000 face value bond has an 8.5% annual coupon. The bond has a current yield of 8%. What is the bond’s yield to maturity?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Your Answer: 8.25 % 8.86 % 7.59 % C ORR ECT ANS WE R 8.50 % IN CO RR ECT
Instructor Explanation: Data given: N = 10; I/YR = ? (This is what the problem is looking for); PMT = 85; PV = ? (Don't have directly, but you can calculate it from the current yield); FV = 1,000. Step 1: Calculate the bond's current price from information given in the current yield. Current yield = Coupon/Price 0.08 = \$85/Price Price = ? = \$1,062.50. Step 2: Given the bond's price, calculate the bond's yield to maturity using your financial calculator by entering the following data as inputs: N = 10; PV = -1062.50; PMT = 85; FV = 1000; and then solve for I/YR = 7.5859% or about 7.59%. Points Received: 0 of 4 3. Question: You wish to purchase a 20-year, \$1,000 face value bond that makes semiannual interest payments of \$40. If you require a 10% nominal yield to maturity, what price should you be willing to pay for the bond?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Your Answer: \$619 \$674 \$761 IN CO RR ECT \$828 C ORR ECT ANS WE R \$902
Instructor Explanation:

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

### Page1 / 21

Unit_5_Assignment - 1 Question Rollincoast Incorporated...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online