This preview shows pages 1–3. Sign up to view the full content.

CHAPTER 7 B-125 If the YTM declines from 8 percent to 6 percent: P J = \$20(PVIFA 3%,18 ) + \$1,000(PVIF 3%,18 ) = \$862.46 P K = \$60(PVIFA 3%,18 ) + \$1,000(PVIF 3%,18 ) = \$1,412.61 P J % = (\$862.46 – 746.81) / \$746.81 = + 15.49% P K % = (\$1,412.61 – 1,253.19) / \$1,253.19 = + 12.72% All else the same, the lower the coupon rate on a bond, the greater is its price sensitivity to changes in interest rates. 18. The bond price equation for this bond is: P 0 = \$1,068 = \$46(PVIFA R% ,18 ) + \$1,000(PVIF R% ,18 ) Using a spreadsheet, financial calculator, or trial and error we find: R = 4.06% This is the semiannual interest rate, so the YTM is: YTM = 2 4.06% = 8.12% The current yield is: Current yield = Annual coupon payment / Price = \$92 / \$1,068 = .0861 or 8.61% The effective annual yield is the same as the EAR, so using the EAR equation from the previous chapter: Effective annual yield = (1 + 0.0406) 2 – 1 = .0829 or 8.29% 19. The company should set the coupon rate on its new bonds equal to the required return. The required return can be observed in the market by finding the YTM on outstanding bonds of the company. So, the YTM on the bonds currently sold in the market is: P = \$930 = \$40(PVIFA R% ,40 ) + \$1,000(PVIF R% ,40 ) Using a spreadsheet, financial calculator, or trial and error we find: R = 4.373% This is the semiannual interest rate, so the YTM is: YTM = 2 4.373% = 8.75%

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

View Full Document
B-126 SOLUTIONS 20. Accrued interest is the coupon payment for the period times the fraction of the period that has passed since the last coupon payment. Since we have a semiannual coupon bond, the coupon payment per six months is one-half of the annual coupon payment. There are four months until the next coupon
This is the end of the preview. Sign up to access the rest of the document.