Tuesday, February 20, 2007 Ch 7-1 & some Ch 6 Soln.

1. A bond that matures in eight years has a par value of $1,000, an annual coupon
payment of $70, and a market interest rate of 9%. What is its price?
N = 8, I/Y = 9%, PMT = 70, FV = $1,000, CPT PV = 889.30

2. A bond that matures in 12 years has a par value of $1,000, an annual coupon of 10%,
and a market interest rate of 8%. What is its price?
N = 12, I/Y = 8%, PMT = 100, FV = $1,000, CPT PV = 1,150.72

3. Halley Enterprises’ bonds currently sell for $975. They have a seven-year maturity, an
annual coupon of $90, and a par value of $1,000. What is their yield to maturity?
N = 7, I/Y = 9.51%, PMT = 90, FV = $1,000, PV = -975

4. Last year a firm issued 20 year, 8% annual coupon bonds at a par value of $1,000.
a. Suppose that one year later the going rate had dropped to 6%. What is the new price of
the bonds, assuming that they now have 19 years to maturity?
N = 19, I/Y = 6%, PMT = 80, FV = $1,000, CPT PV = 1223.16

b. Suppose that one year after issue the going interest rate had been 10%. What would the
price have been?
N = 19, I/Y = 10%, PMT = 80, FV = $1,000, CPT PV = 832.70

5. Hartwell Corporation bonds have a 20 year maturity, an 8% semiannual coupon, and a

face value of $1,000. The going interest rate (rd) is 7%, based on semiannual
compounding. What is the bond’s price? ($1,106.78)
N = 40, I/Y = 3.5%, PMT = 40, FV = $1,000, CPT PV = 1,106.78

6. The real risk-free rate of interest is 3 percent. Inflation is expected to be 2 percent this
year and 4 percent during the next 2 years. Assume that the maturity risk premium is
zero. What is the yield on 3-year Treasury securities?
A. 8.21%
B. 6.0%
C. 8.0%
D. 6.33% - ANSWER
r = r* + IP + MRP
6.33 = 3 + [{2+(4X2)}/3] + 0