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2005
2.
The effective annual yield on the semiannual coupon bonds is 8.16%.
If the annual
coupon bonds are to sell at par they must offer the same yield, which requires an
annual coupon rate of 8.16%.
3.
The bond callable at 105 should sell at a lower price because the call provision is
more valuable to the firm.
Therefore, its yield to maturity should be higher.
4.
The bond price will be lower.
As time passes, the bond price, which is now above
par value, will approach par.
9.
a.On a financial calculator, enter the following:
n = 40; FV = 1000; PV = –950; PMT = 40
You will find that the yield to maturity on a semiannual basis is 4.26%.
This
implies a bond equivalent yield to maturity equal to: 4.26%
×
2 = 8.52%
Effective annual yield to maturity = (1.0426)
2
– 1 = 0.0870 = 8.70%
b.
Since the bond is selling at par, the yield to maturity on a semiannual basis is the
same as the semiannual coupon rate, i.e., 4%.
The bond equivalent yield to
maturity is 8%.
Effective annual yield to maturity = (1.04)
2
– 1 = 0.0816 = 8.16%
c.Keeping other inputs unchanged but setting PV = –1050, we find a bond
equivalent yield to maturity of 7.52%, or 3.76% on a semiannual basis.
Effective annual yield to maturity = (1.0376)
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 Summer '08
 STAFF
 Finance

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