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SOUTHERN NEW HAMPSHIRE FIN500 Module 5 Homework Problem Solution

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Question;(7 total, 100 points)Instructions: Please answer each of the seven (7) practice problems below. Also, please alsoshow as much of your solution steps as is feasible in the space provided beneath each problem.Please be sure to round your answers to two (2) decimal places, also, note that for problemsdealing with a percentage answer such as yields on bonds, your calculator should be set to four(4) decimal places so that after converting your answer to percentage terms your final solutionwill be rounded to two places. Homework set #5 is due by Sunday, October 27, 2013 (bymidnight, uploaded into Turnitin).1. A companys bonds have a 7.60 percent coupon and pay interest annually. The face value is$1,000 and the current market price is $1,062.50 per bond. The bonds mature in 16 years. Whatis the yield to maturity?$1062.50=(.076*1,000)* {1-[1/(1+r)^16 / r + $1,000/ (1+r)^16InputsN=16I/Y= 6.94PV=-1,062.50PMT = 76FV= 1,000YTM= 6.94%2. Assume a company has an outstanding bond issue which carries a 7.5 percent coupon withsemiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. Whatis the market price per bond if the face value is $1,000?FV = $1000YTM=Rate=7.68%/2 = 3.84%nper = 6 Yrs = 12 periods (semi annual)Coupon = 7.5%/2= 3.75PMT = 7.5%*$1000/2 = 37.50Price of Bond = PV(Rate,nper,pmt,fv) = PV(3.84%,12, 37.50,1000) = $991.47Bond Value =$991.473. Suppose you find a 6.5 percent coupon bond with a current market price of $832. The yield tomaturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How manyyears is it until these bonds mature?4. Imagine that today you want to sell a $1,000 face value zero coupon bond you currently own.The bond matures in 4.5 years. How much will you receive for your bond if the market yield tomaturity is currently 5.33 percent? Ignore any accrued interest.5. A company has a 7-year, 6 percent annual coupon bond outstanding with a $1,000 par value.The bond has a yield to maturity of 5.5 percent. Now assume the market yield to maturitysuddenly increases to 7 percent. What will be the percentage change in the market price of thisbonds given the increase in the yield to maturity? (Note: I am asking that you determine thepercentage change in the market price of this bond, not the dollar change in price).6. Suppose you observe that 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The realrisk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquiditypremium for the bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for allbonds is found with the formula MRP = (t 1) 0.1%, where t = number of years to maturity.Whatis the default risk premium (DRP) on the bond in question?R*+IP = 3% + 1.75%= 4.75%MRP =(5-1) *.1% =.004%7. A bond currently sells for $1,250. The bond pays a $120 annual coupon, have a 15-yearmaturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that nocosts other than the call premium would be incurred to call and refund the bonds, and alsoassume that the yield curve is horizontal, with rates expected to remain at current levels on intothe future. What is the yield to call (YTC) on this bond?

 

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