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%