Chapter 5- Questions and Problems:
Answer to Q 2
When the bond is selling at a discount, $970 in this case, the yield to maturity is greater than 8%. We
know that if the discount rate were 8%, the bond would sell at par. At a price below par, the YTM
must exceed the coupon rate.
Current yield equals coupon payment/bond price, in this case, 80/970. So current yield is also greater
than 8%
Answer to Q 6
a.
Current yield = annual coupon/price = $80/1050 =
.0762 =
7.62%.
b.
YTM = 7.2789%. On the calculator, enter PV = (-)1050
FV = 1000, n = 10, PMT = 80, compute i.
Answer to Q 14
a.
With a par value of $1000 and a coupon rate of 8%, the bondholder receives 2 payments of
$40 per year, for a total of $80 per year.
b.
Assume it is 9%, compounded semi-annually.
Per period rate is 9%/2, or 4.5%
Price = 40 × annuity factor (4.5%, 18 years) + 1000/1.045
18
=
$939.20
c.
If the yield to maturity is 7%, compounded semi-annually, the bond will sell above par,
specifically for $1,065.95:
Per period rate is 7%/2 = 3.5%
Price = 40 × annuity factor (3.5%, 18 years) + 1000/1.035
18
= $1,065.95
On your calculator, set n=18, I/Y=3.5, FV=1000, PMT=40 CPT PV=1065.95
Answer to Q 15
On your calculator, set n=30, FV=1000, PMT=97.5
a.
Set PV = (-) 900 and compute the interest rate to find that YTM = 10.89%
b.
Set PV = (-) 1000 and compute the interest rate to find that YTM = 9.75%.
c.