Question

2. Davis Inc.'s bonds currently sell for $800 and have a par value of $1,000. They pay a $100 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,200. What is their Capital Gain Yield (CGY)?

3. A 10-year, 5% semiannual coupon bond selling for $1,135.90 can be called in 4 years for $1,200 (hint: par value is $1,000). What is its yield to maturity (YTM)?

4. A 10-year, 5% semiannual coupon bond selling for $1,135.90 can be called in 4 years for $1,200 (hint: par value is $1,000). What s its current yield (CY)?

5. A 10-year, 10% semiannual coupon bond selling for $1,135.90 can be called in 4 years for $1,200 (hint: par value is $1,000). What is its yield to call (YTC)?

6. Davis Inc.'s bonds currently sell for $800 and have a par value of $1,000. They pay a $100 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,200. What is their yield to maturity (YTM)?

7. Davis Inc.'s bonds currently sell for $800 and have a par value of $1,000. They pay a $60 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,200. What is their Expected Current Yield (CY)?

8. Davis Inc.'s bonds currently sell for $800 and have a par value of $1,000. They pay a $60 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,200. What is their yield to Call (YTC)?

9. Kimberly’ Motors has a beta of 1.40, the T-bill rate is 3.00%, and the Tbond rate is 7.0%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 10.00%. Based on the SML, what is the firm's required return?

10. Suppose the interest rate (return rate) on a 1-year T-bond is 3.0% and that on a 2-year T-bond is 6.0%. Assuming the pure expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now?

11. Stacker’s Corporation's bonds have a 10-year maturity, a 10.00% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 2.00%, based on semiannual compounding. What is the bond’s price?

12. If the pure expectations theory holds, what does the market expect will be the interest rate (expected return rate) on one-year securities, three years from now? (1year maturity yield is 6.0%; 2year maturity yield is 6.1%; 3year maturity yield is 6.3%; 4year maturity yield is 6.3 %; 5year maturity yield is 6.3%)? (Hints: Draw the timeline and then calculate the interest rate (expected return rate) on two-year securities, two years from now.)

Answer 1

2. Capital gain yield = (call price or sale price/purchase price)1/no. of years - 1

Capital gain yield = ($1,200/$800)1/5 - 1 = 1.5‬0.2 - 1= 1.0845 - 1 = 0.0845 or 8.45%

8.45% is annualized capital gain yield. normal capital gain yield is ($1,200/$800) - 1 = 1.5 - 1 = 0.5 or 50%.

3. Yield to maturity

Face value	$1,000
Current price	$1,135.90
Maturity (in years)	10
Annual coupon rate	5%
Periods per year	2
Yield to Maturity	3.39%

Yield to maturity calculated by formula is semi-annual. so, it is multiplied by 2 to make it annual.

Calculations

4. Current yield = annual coupon/current price = ($1,000*5%)/$1,135.90 = $50‬/$1,135.90 = 0.0440 or 4.40%

5. Yield to call

Face value	$1,000
Current price	$1,135.90
Maturity (in years)	10
Annual coupon rate	10%
Periods per year	2
Years to call	4
Call price	$1,200.00
Yield to Call	9.99%

Yield to call calculated by formula is semi-annual. so, it is multiplied by 2 to make it annual.

Calculations