Unit_5_Assignment - 1. Question: Rollincoast Incorporated...

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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?
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Your Answer: 7.8 % 8.7 % 9.2 % C ORR ECT ANS WE R 10.2 % IN CO RR ECT
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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?
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Your Answer: 8.25 % 8.86 % 7.59 % C ORR ECT ANS WE R 8.50 % IN CO RR ECT
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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?
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Your Answer: $619 $674 $761 IN CO RR ECT $828 C ORR ECT ANS WE R $902
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Instructor Explanation:
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Unit_5_Assignment - 1. Question: Rollincoast Incorporated...

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