# BKM11e_Chap014_Answers.pdf - CHAPTER 14 PROBLEM...

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CHAPTER 14: PROBLEM SETS (Selected Answers) Page 1 of 4 5. Annual coupon rate: 4.80% \$48 Coupon payments Current yield: \$48 4.95% \$970 6. a. Effective annual rate for 3-month T-bill: % 0 . 10 100 . 0 1 02412 . 1 1 645 , 97 000 , 100 4 4 b. Effective annual interest rate for coupon bond paying 5% semiannually: (1.05. 2 1) = 0.1025 or 10.25% Therefore the coupon bond has the higher effective annual interest rate. 9. Yield to maturity: Using a financial calculator, enter the following: n = 3; PV = 953.10; FV = 1000; PMT = 80; COMP i This results in: YTM = 9.88% Realized compound yield: First, find the future value (FV) of reinvested coupons and principal: FV = (\$80 1.10 1.12) + (\$80 1.12) + \$1,080 = \$1,268.16 Then find the rate ( y realized ) that makes the FV of the purchase price equal to \$1,268.16: \$953.10 (1 + y realized ) 3 = \$1,268.16 y realized = 9.99% or approximately 10% Or, using a financial calculator, enter the following: N = 3; PV = 953.10; FV = 1,268.16; PMT = 0; COMP I. Answer is 9.99%. 10. a. Zero coupon 8% coupon 10% coupon Current prices \$463.19 \$1,000.00 \$1,134.20 b. Price 1 year from now \$500.25 \$1,000.00 \$1,124.94 c. Price increase \$ 37.06 \$ 0.00 \$ 9.26 Coupon income \$ 0.00 \$ 80.00 \$100.00 Pretax income \$ 37.06 \$ 80.00 \$ 90.74 Pretax rate of return 8.00% 8.00% 8.00% d. Taxes* =37.06 .3 =80 .3 =(-9.26) .2+100 .3 \$ 11.12 \$ 24.00 \$ 28.15 After-tax income \$ 25.94 \$ 56.00 \$ 62.59 After-tax rate of return 5.60% 5.60% 5.52% e. Price 1 year from now \$543.93 \$1,065.15 \$1,195.46 Price increase \$ 80.74 \$ 65.15 \$ 61.26 Coupon income \$ 0.00 \$ 80.00 \$100.00 Pretax income \$ 80.74 \$145.15 \$161.26 Pretax rate of return 17.43% 14.52% 14.22% Taxes \$ 19.86 \$ 37.03 \$ 42.25 After-tax income \$ 60.88 \$108.12 \$119.01 After-tax rate of return 13.14% 10.81% 10.49%