Questions assigned in this assignment are similar to problems assigned above. However, the numbers in these questions are different from your textbook.
You must show the work to get full credit in each question.
Assigned problems:
Problem 5-9 Bond Valuation and Interest Rate Risk
The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year.
a.
1. What will be the value of each of these bonds when the going rate of interest is 4%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.
Bond L
$
Bond S
$
2. What will be the value of each of these bonds when the going rate of interest is 7%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.
Bond L
$
Bond S
$
3. What will be the value of each of these bonds when the going rate of interest is 11%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.
Bond L
$
Bond S
$
Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)? I. Longer-term bonds have more interest rate risk than shorter-term bonds. II. Shorter-term bonds have more interest rate risk than longer-term bonds. III. Longer-term bonds have more reinvestment rate risk than shorter-term bonds.
Problem 5-12 Bond Yields and Rates of Return
A 25-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,100. The bond sells for $950. (Assume that the bond has just been issued.)
a. What is the bond’s yield to maturity? Round your answer to two decimal places.
b. What is the bond’s current yield? Round your answer to two decimal places.
c. What is the bond’s capital gain or loss yield? Loss should be indicated with minus sign. Round your answer to two decimal places.
d. What is the bond’s yield to call? Round your answer to two decimal places.
Problem 5-23 Determinants of Interest Rates
Suppose you and most other investors expect the inflation rate to be 6% next year, to fall to 4% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term securities (those that mature in a few days) to a level of 0.2 percentage points for 1-year securities. Furthermore, maturity risk premiums increase 0.2 percentage points for each year to maturity, up to a limit of 1.0 percentage point on 5-year or longer-term T-notes and T-bonds.
a. Calculate the interest rate on 1-year Treasury securities. Round your answer to two decimal places. Calculate the interest rate on 2-year Treasury securities. Round your answer to two decimal places. Calculate the interest rate on 3-year Treasury securities. Round your answer to two decimal places. Calculate the interest rate on 4-year Treasury securities. Round your answer to two decimal places. Calculate the interest rate on 5-year Treasury securities. Round your answer to two decimal places. Calculate the interest rate on 10-year Treasury securities. Round your answer to two decimal places. Calculate the interest rate on 20-year Treasury securities. Round your answer to two decimal places.
e.