Week 6 Assignment

W6 Assignment "Chapter 5"

QUESTIONS: 5

-

4, 5

-

5

5

-

4.

If you buy a callable bond and interest rates decline, will th

e value of your bond rise by as

much as it

would have risen if the bond had not been callable? Explain.

5

-

5.

A sinking fund can be set up in one of two w

ays. Discuss the advantages and

disadvantages of each

procedure from the viewpoint of

bot

h the firm and its bondholders.

PROBLEMS: 5

-

6, 5

-

12, 5

-

20

5

-

6.

The real risk

-

free rate is 3%, and inflation is expec

ted to be 3%

for the next 2 years. A 2

-

year

Treasury

security yields 6.3%. What is the maturity risk p

remium for the 2

-

year security?

5

-

12.

A 10

-

year, 12% semiannual coupon bond with a par value of $1,000 may be called in

4 years at a call price of $1,060. The bond sells for $1

,100. (Assume that the bond has

just been issued.)

a. What is the bond’s yield to maturity?

b. What is the bond’s current yield?

c. What is the bond’s capital gain or loss yield?

d. Wh

at is the bond’s yield to call?

5

-

20.

Because of a recession, the inflation rate expected

for the coming year is only 3%.

However, the inflation

rate in Year 2 and thereafter is

expected to be constant at some

level a

bove 3%. Assume that the real

risk

-

free rate is r* =

2% for all maturities and that

there are no maturity premiums. If 3

-

year Treasury

notes

yield 2 percentage points more

than 1

-

year notes, what inflation rate is expected after Year 1?

W6 Assignment "Chapter 5"

QUESTIONS: 5-4, 5-5

5-4.

If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it

would have risen if the bond had not been callable? Explain.

5-5.

A sinking fund can be set up in one of two ways. Discuss the advantages and disadvantages of each

procedure from the viewpoint of both the firm and its bondholders.

PROBLEMS: 5-6, 5-12, 5-20

5-6.

The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury

security yields 6.3%. What is the maturity risk premium for the 2-year security?

5-12.

A 10-year, 12% semiannual coupon bond with a par value of $1,000 may be called in

4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.)

a. What is the bond’s yield to maturity?

b. What is the bond’s current yield?

c. What is the bond’s capital gain or loss yield?

d. What is the bond’s yield to call?

5-20.

Because of a recession, the inflation rate expected for the coming year is only 3%. However, the inflation

rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that the real

risk-free rate is r* = 2% for all maturities and that there are no maturity premiums. If 3-year Treasury

notes yield 2 percentage points more than 1-year notes, what inflation rate is expected after Year 1?