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Bonds and Coupon Rates

1. AR store issued 15 year bonds one year ago at a coupon rate of 6.1%. The bonds make semi-annual payments. If the YTM on these bonds is 5.3%, what is the current bond price?

2. NH Co. issued 15 year bonds two years ago at a coupon rate of 8.4%. The bonds make semi-annual payments. If these bonds currently sell for 108% of par value, what is the YTM?

3. Ozzy Corp. has bonds on the market with 10.5 years to maturity, a YTM of 9.4%, and a current price of $945. The bonds make semi-annual payments. What must the coupon rate be on the bonds?

4. If the treasury bills are currently paying 5.7% and the inflation rate is 2.9%, what is the approximate real rate of interest? The exact real rate?

5. Suppose the real rate is 3.2% and the inflation rate is 2.6%. What rate would you expect to see on a Treasury bill?

6. An investment offers a 13% total return over the coming year. Bill B. thinks the total real return on this investment will be only 7%. What does Bill believe the inflation rate will be over the next year?

7. Say you own an asset that had a total return last year of 17%. If the inflation rate last year was 3.2%, what was your real return?

Solution Preview

1. AR store issued 15 year bonds one year ago at a coupon rate of 6.1%. The bonds make semi-annual payments. If the YTM on these bonds is 5.3%, what is the current bond price?

P = $30.5(PVIFA (2.65%,28) ) + $1,000(PVIF (2.65%,28) ) = $597.59 + $480.78
P = $ 1078.37

2. NH Co. issued 15 year bonds two years ago at a coupon rate of 8.4%. The bonds make semi-annual payments. If these bonds currently sell for 108% of par value, what is the YTM?

P = $1,080 = $42(PVIFAR (R%,26) ) + $1,000(PVIFR (R%,26) )

R = [$42 + (-$80 / ...

Solution Summary

Bonds and coupon rates are analyzed. The treasury bills which are currently paying are given. The inflation rates are analyzed.

$2.19