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BKM11e Chap014 Answers.pdf - CHAPTER 14: PROBLEM SETS ...

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CHAPTER 14: PROBLEM SETS (Selected Answers)Page1of45.Annual coupon rate: 4.80%$48 Coupon paymentsCurrent yield:$484.95%$9706.a.Effective annual rate for 3-month T-bill:%0.10100.0102412.11645,97000,10044b.Effective annual interest rate for coupon bond paying 5% semiannually:(1.05.21) = 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; COMPiThis results in: YTM = 9.88%Realized compound yield:First, find the future value (FV) of reinvested coupons and principal:FV = ($801.101.12) + ($801.12) + $1,080 = $1,268.16Then find the rate (yrealized) that makes the FV of the purchase price equal to $1,268.16:$953.10(1 +yrealized)3= $1,268.16yrealized= 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.Answeris 9.99%.10.a.Zero coupon8% coupon10% couponCurrent prices$463.19$1,000.00$1,134.20b. Price 1 year from now$500.25$1,000.00$1,124.94c. Price increase$ 37.06$0.00$ 9.26Coupon income$0.00$ 80.00$100.00Pretax income$ 37.06$ 80.00$ 90.74Pretax rate of return8.00%8.00%8.00%d. Taxes*=37.06.3=80.3=(-9.26).2+100.3$ 11.12$ 24.00$ 28.15After-tax income$ 25.94$ 56.00$ 62.59After-tax rate of return5.60%5.60%5.52%e. Price 1 year from now$543.93$1,065.15$1,195.46Price increase$ 80.74$ 65.15$ 61.26Coupon income$0.00$ 80.00$100.00Pretax income$ 80.74$145.15$161.26Pretax rate of return17.43%14.52%14.22%Taxes$ 19.86$ 37.03$ 42.25After-tax income$ 60.88$108.12$119.01After-tax rate of return13.14%10.81%10.49%
CHAPTER 14: PROBLEM SETS (Selected Answers)Page2of4* In computing taxes, we assume that the 10% coupon bond was issued at par and that the decrease in price

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