5-4)

Data: -
Real risk-free rate of return (r*): - 4%
Expected inflations for 3 years: - 2%, 4%, 4%
Maturity risk premium: - 0
Yield on 2-year treasury: -?
Yield on 3-year treasury: -?
Solution: -
Finding average inflation for 2 years: -
2+4/2 = 3%
Finding average inflation for 3 years: -
2+4+4/3 = 3.33%
Now we will add them up with the real risk-free rate to find out the overall yield: -
Yield on 2-year treasury bill 4+3 = 7% Answer
Yield on 3-year treasury bill 4+33.3 = 7.33% Answer
5-5)
Date: -
Yield on 10-year treasury bond: - 6% (higher grade bond)
Yield on 10-year corporate bond: - 9% (lower grade bond)
Liquidity premium: - 0.5%
Default risk premium: -?
Solution: -
Finding a spread between treasury bond and corporate bond: -
9-6 = 3%
This 3% is also consist of liquidity premium therefore: -
3-0.5 = 2.5% Answer
5-6)
Date: -
Real risk-free rate of return (r*): - 3%
Inflation for the 2-years: - 3%, 3%
2-year treasury bill yield: - 6.3%
Maturity Risk premium (MRP): -?
Solution: -
Finding average inflation for 2-years: -
3+3/2 + 3%
Now finding the market rate of return of the similar T-bill with longer maturity period than
2-year: -
Formula: - Risk free rate of return = r* + LP
3 + 3 = 6%
Now finding the maturity risk premium of 2-year treasury bond: -
6.3 – 6 = 0.3% Answer
5-7)
Data: -
Coupon rate (i): - 10% (semiannually)
Maturity period (N): - 8 years
Face value (M): - 1000
Yield to maturity (YTM): - 8.5%
Solution: -
Finding INT: -
Formula: - M x i/2
1000 x 10%/2 = 50
Now finding value of the bond: -
Formula: - INT (1-(1+rd/2)^-Nx2 )/rd/2 + M(1+rd/2)^-Nx2
50 (1-(1+8.5%/2)^-8x2)/8.5%/2 + 1000(1+8.5%/2)^-8x2
 50 (11.4403) + 1000(1+8.5%/2)^-8x2
50 (11.4403) + 513
1085.08 Answer
5-8)
Data: -
Coupon rate (i): - 8% (semiannually)
Maturity period (N): - 10 years
Face value (M): - 1000
Yield to maturity (YTM): - ?
Price of the bond: - 1100
Callable period: - 5-years
Call price: - 1,050
Yield to call (YTC): - ?
Solution: -
Finding INT: -
Formula: - M x i/2
1000 x 8%/2 = 40
Now finding yield to maturity: -
Formula: - INT(1- (1 + ytm/2)^-Nx2/ytm/2 + M(1+ytm/2)^-Nx2
40(1-(1+6.62%/2)^-10x2/6.62%/2 + 1000(1+6.62%/2)^10x2
1100 Answer YTM = 6.62% Answer
Now finding yield to call: -
Formula: - INT(1- (1 + ytc/2)^-Nx2/ytc/2 + M(1+ytm/2)^-Nx2
40(1-(1+6.49%/2)^-5x2/6.49%/2 + 1,050(1+6,49%/2)^5x2
1100 Answer YTC = 6.49% Answer.
5-15)
Data: -
 Coupon rate (i): - 14% (semiannually)
Maturity period (N): - 30 years
Face value (M): - 1000
Price of the bond: - 1353.54
Callable period: - 5-years
Call price: - 1,050
Yield to call (YTC): - ?
Solution: -
Finding INT: -
Formula: - M x i/2
1000 x 14%/2 = 70
Now finding yield to call: -
Formula: - INT(1- (1 + ytc/2)^-Nx2/ytc/2 + M(1+ytm/2)^-Nx2
70(1-(1+6.47%/2)^-5x2/6.47%/2 + 1050(1+6.47%/2)^5x2
1353.54 Answer yield to call (YTM) = 6.47% Answer

(5-22).

Data: -

Coupon rate (i): -11%

Face value (M): - 1,000

Price of the bond (VB): - 1,200

Maturity period (N): - 10 years

Callable periods: - 5 years

Call price: - 1,090

Solution: -

Finding INT: -

Formula: - M x i

1000 x 11% = 110

Finding yield to maturity (YTM): -

Formula: - INT(1-(1+YTM)^-n/YTM)+M(1+YTM)^-n

1,200=110(1-(1+8.02%)^-10/8.02%)+1000(1+8.02%)^10

1,200=1,200

Finding yield to call (YTC): -

Formula: -VB=INT(1-(1+YTC)^-n/YTC)+Call Price(1+YTC)^-n

1,200=110(1-(1+7.59%)^-5/7.59%+1,090(1+7.59%)^-5

1,200=1,200