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

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%

CHAPTER 14: PROBLEM SETS (Selected Answers)
Page 2 of 4
* In computing taxes, we assume that the 10% coupon bond was issued at par and that the decrease in price