In: Accounting
1. You find a zero coupon bond with a par value of $10,000 and 17 years to maturity. If the yield to maturity on this bond is 4.2 percent, what is the price of the bond? Assume semiannual compounding periods. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
2. Union Local School District has a bond outstanding with a coupon rate of 2.8 percent paid semiannually and 16 years to maturity. The yield to maturity on this bond is 3.4 percent, and the bond has a par value of $5,000. What is the price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
3. Suppose the real rate is 2.1 percent and the inflation rate is 3.4 percent. | ||||||||||
What rate would you expect to see on a Treasury bill? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
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7. Chamberlain Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 6 percent coupon bonds on the market that sell for $1,083, make semiannual payments, and mature in 20 years. |
What coupon rate should the company set on its new bonds if it wants them to sell at par? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
1 | Par Value (FV) | $10,000 | |||||||
Years to Maturity (NPER) | 34 | 17*2 | |||||||
Yield to Maturity (Rate ) - Semi Annual | 0.021 | 4.2%/2 | |||||||
Price of Bond = 10000*(1/(1.021^34)) | |||||||||
Price of Bond | 4933.16 | ||||||||
2 | Coupon Rate Semi annual | 1.4 | 2.8%/2 | ||||||
Coupon Amount (PMT) | 70 | 5000*1.4% | |||||||
No of Payments (NPER) | 32 | 16*2 | |||||||
Yield to Maturity (Rate) | 1.7 | 3.4/2 | |||||||
Price of Bond | ($4,632.13) | PV(1.7%,32,70,5000) | |||||||
Price of Bond | $4,632.13 | ||||||||
3 | Real Rate | 2.10% | |||||||
Inflation Rate | 3.40% | ||||||||
Treasury Bill Rate | |||||||||
Fisher Equation shows exact relationship between nominal interest rates, real interest rates and inflation | |||||||||
(1+R) = (1+r)(1+h) | |||||||||
R = (1.034)(1.021) - 1 | |||||||||
0.055714 | |||||||||
Treasury Bill | 5.57% | ||||||||
4 | Total Return | 12.30% | |||||||
Real Return on investment | 8% | ||||||||
Inflation Rate | |||||||||
(1+R) = (1+r)(1+h) | |||||||||
(1.1230) = (1+r)(1.08) | |||||||||
1.1230/1.08 - 1 | r | ||||||||
r | 3.98% | ||||||||
Inflation Rate is 3.98% | |||||||||
5 | Total Return | 11.65% | |||||||
Inflation Rate | 2.75% | ||||||||
Real Rate | |||||||||
(1+R) = (1+r)(1+h) | |||||||||
(1.1165) = (1.0275)(1+h) | |||||||||
(1.1165/1.0275) - 1 = h | |||||||||
h | 8.66% | ||||||||
Real Return | 8.66% | ||||||||
6 | Coupon Rate | 6.40% | |||||||
Coupon Amount (PMT) | 32 | (6.40%*1000)/2 | |||||||
Par Value (FV) | 1000 | ||||||||
Sell Price (PV) | 943.1 | 1000*94.31% | |||||||
No of Payments (NPER) | 36 | 18*2 | |||||||
Current Yield = Coupon Amount/Purchase Price | |||||||||
32/943.10 | |||||||||
Current Yield | 3.39% | ||||||||
Using Rate Function we can calculate YTM | |||||||||
3.48% | |||||||||
Annual Yield to Maturity | 2*0.0348 | 6.96% | |||||||
Effective Annual Yield = | (1+(r/n)^n - 1 | ||||||||
(1+(6.40%/2)^2 - 1 | |||||||||
6.50% | |||||||||
7 | No of payments (NPER) | 40 | 20*2 | ||||||
Coupon Rate | 0.03 | 6%/2 | |||||||
Coupon Amount (PMT) | 30 | 1000*3% | |||||||
Par Value (FV) | $1,000 | ||||||||
Current Price (PV) | $1,083 | ||||||||
We would calculate first the Yield to maturity of the bond | |||||||||
2.66% | RATE(40,30,-1083,1000) | ||||||||
Yield to Maturity(Annual) | 2*2.66 | 5.32% | |||||||
The company should have coupon rate of 5.32% on its new bonds if they want to sell at par | |||||||||
When coupon rate = yield to maturity, the bonds price is equal to par value of bond | |||||||||