FIN515 Week 3 Homework Assignment

Apr 24th, 2015
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FIN515 Week 3 Homework Assignment

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5-1 Bond Valuation with Annual paymentsJackson Corporation's bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds?Ans:Years to Maturity12Annual Payment$80Par value$1,000Going rate, rd9%Value of bond =$928.39 Current market price of these bonds = $ 928.395-2 Yield to Maturity for Annual paymentsWilson Wonders's bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity?Ans:Years to Maturity12Annual Payment$100.00Current price$850.00Par value = FV$1,000.00Going rate, rd =YTM:12.48%5-6 Maturity Risk PremiumThe real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security?Ans:Real risk-free rate = 3 %Inflation Premium = 3%A 2-year Treasury security yields = 6.3%Maturity risk premium for the 2-year security = 6.3% - ( 3%+3%) = 0.3%5-7 Bond Valuation with Semi-annual paymentsRenfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?Ans:Annual values

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