E6-1

5%+2.4%
7.4% The nominal rate of return on T-bills is 7.4%

E6-3

maturity yield real rate of interest inflation expectation

3m 1.41% 0.80% 0.61%
6m 1.71 0.80 0.91
2y 2.68 0.80 1.88
3y 3.01 0.80 2.21
5y 3.7 0.80 2.90
10y 4.51 0.80 3.71
30y 5.25 0.80 4.45

P6-9

security a security b
real rate of interest 2% 2%
inflation premium 9% 7%
11% 9%
the risk-free rate of security a is 11%
the risk-free rate of security b is 9%

b
security a security b
liquidity risk 1.0% 1.0%
deafult risk 1.0% 2.0%
maturity risk 0.5% 1.5%
other risk 0.5% 1.5%
3.0% 6.0%
total risk premium for security a is 3%
total risk premium for security b is 6%

c
security a security b
expected inflation premium 9% 7%
risk premium 3% 6%
real rate of interest 2% 2%
14% 15%
the nominal interest rate for security a is 14%
the nominal interest rate for security b is 15%

from the calculations, we can see that the nominal interest rate for security b is 1% higher than security a
This conclusion may appear surprising at first because the risk premium for security b is significantly larger than that for securi
However, because the inflation premium is larger for security a, this impact is neutralized, resulting in similar nominal interest

P6-10
A
no. of bonds issued 50,000,000/1,000
50,000
b
at maturity total expense would be (50m+3mx10yrs) 80,000,000
c
net after-tax total expense 50,000,000/(3,000,000 x 10 x (1-38%)
68,600,000
rger than that for security a.
similar nominal interest rates.
P6-13

PG-14

B
Based on these findings, we may conclude that the lowest
amount Laura must pay is when the assets are at danger.
(13,030.91)

So, if she wants to be sure that she will get a fair bargain,
the bare least she must spend is 13,030.91
(recall that the rate of return is biggest for the high-risk assets).
C

Based on the facts, we may deduce that the asset's value

decreases as the risk grows. The needed rate of return
rises as the risk rises, implying that the asset's value falls
as the risk rises. PILI KA
By raising the risk of obtaining cash flow from an asset,
the needed rate of return rises, lowering the asset's value. PILI KA

Based on the results, we may deduce that the asset's

value decreases as the risk grows. The needed rate of
return rises, lowering the asset's value

p6-17 sol'n nakabookmark h

a
required return of 11% 1,000,000
required return of 15% 783.18
required return of 8% 1,226.08

As can be observed, the bond value falls as the needed return rises.

When the needed return is less than the coupon rate, the
bond's market value exceeds the par value, and it sells for
a premium. When the needed return exceeds the coupon
rate, the market value is less than the par value, and the
bond is thus sold at a discount.

d
Because either the necessary return on the bond or the
coupon interest rate is likely to change,

Because of changes in economic circumstances, the cost

of funding has changed since the bond was issued.
The firm's risk has changed.

p6-21
a.
price 1045
period to maturity 10*2 20
face value 1000
annual coupon (1000*0.05/2) 25

SOLVING FOR YTM

0.02219 or 2.219% semi-anually. (4.438% per annum)

b.

Interest rates and bond prices are inversely related; as

one rises, the other falls down. What happens if interest
rates fall? If interest rates fell below your original 5%
coupon rate,

Your bond is more valuable than $1,000. It would be more

expensive since it would have a higher interest rate than
what was already available on the market. As a result, buy
bonds when interest rates are low.
P6-16 P6-22 P6-8
A.
Nominal Rate
Inflation Rate
Real Return

b.
security a
security b
security c
security d
security e
4%
2%
2%