E 7 - 1) Staind, Inc., has 7.5 percent coupon bonds on the...

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1) Staind, Inc., has 7.5 percent coupon bonds on the market that have 10 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 8.75% what is the current market price? The price of any bond is the PV of the interest payment, plus the PV of the par value. Notice this bond as an annual coupon. The price of the bond will be: Price = PV of coupon payments + PV of face value PV of coupon payments: PV=75 ($1000*.075), n=10, i=8.75 PV of face value: FV=1000,n=10,i=8.75 Price = 75({1 – [1/(1 + .0875)] 10 } / .0875) + 1,000[1 / (1 + .0875) 10 ] = $918.89 2) Grohl Co. issued 11-year bonds a year ago at a coupon rate of 6.9 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.4 percent, what is the current bond price? Start with the coupon payments: How many coupon payments do you expect to receive if you buy this bond and hold it to maturity? (n) How does the interest rate match the periods of the coupon payments? (i) What is the amount of the coupon payment? (pmt) What is the face value? (FV) 3) To find the price of this bond, we need to realize that the maturity of the bond is 10 years. The bond was issued one year ago, with 11 years to maturity, so there are 10 years left on the bond. Also, the coupons are semiannual, so we need to use the semiannual interest rate and the number of semiannual periods. The price of the bond is: PMT=34.50,n=20,i=3.7, solve for PV FV=1000,n=20,i=3.45 P=$34.50(PVIFA 3.7%,20 ) + $1,000(PVIF 3.7%,20 ) = $965.10 4) If Treasury bills are currently paying 7 percent and the inflation rate is 3.8 percent, what is the approximate real rate of interest? The exact real rate? The approximate relationship between nominal interest rates ( R ), real interest rates ( r ), and inflation ( h ) is: R = r + h Approximate r = .07 – .038 =.032 or 3.20% The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is: (1 + R ) = (1 + r )(1 + h ) (1 + .07) = (1 + r )(1 + .038) Exact r = [(1 + .07) / (1 + .038)] – 1 = .0308 or 3.08%
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This note was uploaded on 02/15/2012 for the course FIN 301 taught by Professor Ouyang during the Spring '08 term at Drexel.

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E 7 - 1) Staind, Inc., has 7.5 percent coupon bonds on the...

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