Question

1. What is the current price of a bond issued by Dundee International which pays a semiannual coupon rate of 6 8/9%? The bond matures in 5 years and the required return on investments of similar risk is 6.5%.
2. Maxine Corp has a 5 1/8% coupon bond outstanding in 2004. The bond matures on April 1 in the maturity year. Suppose an investor bought this bond on April 1, 1999 and assume that interest is paid annually on April Calculate the yield-to-maturity assuming the investor buys the bond at 105, as quoted in the financial press.
3. Determine the expected inflation rate if the nominal rate of return is 10% and the real rate of return is 7%.

Answer 1

1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =5x2

Bond Price =∑ [(6.8889*1000/200)/(1 + 6.5/200)^k]     +   1000/(1 + 6.5/200)^5x2

k=1

Bond Price = 1016.38

2

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =5

105 =∑ [(5.125*100/100)/(1 + YTM/100)^k]     +   100/(1 + YTM/100)^5

k=1

YTM% = 4

3

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

0.07=((1+0.1)/(1+inflation rate)-1)*100

inflation rate% = 2.8