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

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CHAPTER 14: PROBLEM SETS (Selected Answers)Page1of45.Annual coupon rate: 4.80%ïƒ \$48 Coupon paymentsCurrent yield:\$484.95%\$970ïƒ¦ïƒ¶ï€½ïƒ§ïƒ·ïƒ¨ïƒ¸6.a.Effective annual rate for 3-month T-bill:%0.10100.0102412.11645,97000,10044ï€½ï€½ï€­ï€½ï€­ïƒ·ïƒ¸ïƒ¶ïƒ§ïƒ¨ïƒ¦b.Effective annual interest rate for coupon bond paying 5% semiannually:(1.05.2âˆ’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 =ï€­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 = (\$80ï‚´1.10ï‚´1.12) + (\$80ï‚´1.12) + \$1,080 = \$1,268.16Then find the rate (yrealized) that makes the FV of the purchase price equal to \$1,268.16:\$953.10ï‚´(1 +yrealized)3= \$1,268.16ïƒžyrealized= 9.99% or approximately 10%Or, using a financial calculator, enter the following: N = 3; PV =ï€­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\$0.00âˆ’\$ 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*=37.06ï‚´.3=80ï‚´.3=(-9.26)ï‚´.2+100ï‚´.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%Taxesâ€ \$ 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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