Finance Practice Questions Ch.5 1-5

5-1

With your financial calculator, enter the following:
N = 12; I/YR = YTM = 9%; PMT = 0.08 × 1,000 = 80; FV = 1000; PV = VB = ?
PV = $928.39.
Alternatively,
VB = $80((1- 1/1.0912)/0.09) + $1,000(1/1.0912)
= $928.39

5-2

With your financial calculator, enter the following:
N = 12; PV = -850; PMT = 0.10 × 1,000 = 100; FV = 1000; I/YR = YTM = ?
YTM = 12.48%.

5-3

With your financial calculator, enter the following to find the current value of the
bonds, so you can then calculate their current yield:
N = 7; I/YR = YTM = 8; PMT = 0.09 × 1,000 = 90; FV = 1000; PV = VB = ?
PV = $1,052.06. Current yield = $90/$1,052.06 = 8.55%.
Alternatively,
VB = $90((1- 1/1.087)/0.08) + $1,000(1/1.087)
= $1,052.06.
Current yield = $90/$1,052.06 = 8.55%.

5-4

r* = 4%; I1 = 2%; I2 = 4%; I3 = 4%; MRP = 0; rT-2 = ?; rT-3 = ?
r = r* + IP + DRP + LP + MRP.
Since these are Treasury securities, DRP = LP = 0.
rT-2 = r* + IP2
IP2 = (2% + 4%)/2 = 3%
rT-2 = 4% + 3% = 7%.
rT-3 = r* + IP3
IP3 = (2% + 4% + 4%)/3 = 3.33%
rT-3 = 4% + 3.33% = 7.33%.

5-5

rT-10 = 6%; rC-10 = 9%; LP = 0.5%; DRP = ?
r = r* + IP + DRP + LP + MRP.
rT-10 = 6% = r* + IP + MRP; DRP = LP = 0.
rC-10 = 8% = r* + IP + DRP + 0.5% + MRP.
Because both bonds are 10-year bonds the inflation premium and maturity risk
premium on both bonds are equal. The only difference between them is the
liquidity and default risk premiums.
rC-10 = 9% = r* + IP + MRP + 0.5% + DRP. But we know from above that r* + IP
+ MRP = 6%; therefore,
rC-10 = 9% = 6% + 0.5% + DRP
2.5% = DRP.