Chapter 7- HW Practice

Sqeekers Co. issued 11-year bonds a year ago at a coupon rate of 8.3 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 6.6 percent, what is the current bond price?

$ 1,123.02 calculator solution: SOLVING FOR PV N: 20 (B/c it was issued a year ago, multiply 10 by 2) I/Y: 6.6/ 2 PMT: 83/ 2 FV: 1,000 (Calc I/Y and PMT before entering in calc)

Suppose the real rate is 4.5 percent and the inflation rate is 6.1 percent. What rate would you expect to see on a Treasury bill?

10.87% explanation: [(1.045)x(1.061)]-1= .1087 x 100= 10.87

Say you own an asset that had a total return last year of 10.2 percent. If the inflation rate last year was 3.9 percent, what was your real return?

6.06% explanation: (1 + R) = (1 + r)(1 + h) r = [(1 + .102) / (1 + .039)] - 1 r = .0606, or 6.06%

DMA Corporation has bonds on the market with 12.5 years to maturity, a YTM of 7.3 percent, and a current price of $1,057. The bonds make semiannual payments and have a par value of $1,000. What must the coupon rate be on these bonds?

8.01% calculator solution: SOLVING FOR PMT (PAYMENT) N: 25 -- (12.5 x 2) I/Y: 7.3/ 2 (7.3= current YTM) PV: 1057 FV: 1,000

Heginbotham Corp. issued 15-year bonds two years ago at a coupon rate of 9.1 percent. The bonds make semiannual payments. If these bonds currently sell for 103 percent of par value, what is the YTM?

8.70% calculator solution: SOLVING FOR I/Y N: 26--(13 x 2) PV: 1,030 PMT: 91/ 2 (91 =coupon rate, move decimal two places to the right) FV: 1,000 *once I/Y is calculated: MULTIPLY VALUE BY 2 TO GET FINAL ANSWER*

Treasury bills are currently paying 6 percent and the inflation rate is 3 percent. What is the approximate real rate of interest? What is the exact real rate?

Approximate real rate 3.00 % explanation: r=.06-.03 Exact real rate 2.91 % explanation: r= [1.06 / 1.03]-1= .0291 x 100 = 2.91