Ch 14 revised 2005

Ch 14 revised 2005 - CHAPTER 14: BOND PRICES AND YIELDS...

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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 semi-annual 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 semi-annual basis is the same as the semi-annual 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 semi-annual basis. Effective annual yield to maturity = (1.0376)
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Ch 14 revised 2005 - CHAPTER 14: BOND PRICES AND YIELDS...

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