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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.

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