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- Exam 2 Review

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If you own an asset that had a total return last year of 11.4%, and the inflation rate last year was 4.8% then what was your real return?

Use the Fisher Equation

1+R=(1+r)*(1+h)

r=(1+R)/(1+h)

r=1.114/1.048

r=6.3%

If you buy a 4% coupon, 20 year bond today when it's first issued, interest rates suddenly raise to 9% , what happens to the value of your bond?

The value of your bond falls because the coupon payments you're getting are as valuable as interest rates rise.

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There is a 7.5 % coupon bond that has 10 years left to maturity. The bond makes annual payments. If the YTM on these bonds is 8.75% what is the current bond price?

N = 10

COMPUTE PV = $918.89

I/Y = 8.75

PV = ?

PMT = 75

FV = 1000

COMPUTE PV = $918.89

A company has 9% coupon bonds on the market that have 9 years left to maturity. The bond makes annual payments. If the bond currently sells for $934 what is the YTM>

N=9

I/Y=?

PV=-934

PMT=90

FV=1000

COMPUTE I/Y = 10.15

There is a bond that makes annual payments, with 13 years to maturity, and selling from $1,045. At this price the bond yields 7.5%. What is the coupon rate on the bonds?

N=13

I/Y=7.5%

PV=-$1,045

PMT = ?

FV= $1,000

COMPUTE PMT = 80.54

80.54/1000 = 8.05%1

A company issued 11 year bonds one year ago at a coupon rate of 6.9%. The bonds make semi-annual payments. If the YTM on these bonds is 7.4%, what is the current bond price?

N=10

COMPUTE PV= $965.52

I/Y=7.4

PV=?

PMT=69

FV=1000

COMPUTE PV= $965.52

A company issued 12 year bonds 2 years ago at a coupon rate of 8.4%. The bonds make semiannual payments, If these bonds currently sell for 105% of par value, what is the YTM?

N = 20

I/Y=?

PV=1050

PMT=42

FV=1000

COMPUTE I/Y= 3.837

3.837*2 = 7.67%

A corporation has bonds on the market with 14.5 years to maturity, a YTM of 6.8% and a current price of $924. The bond makes semiannual payments. What must the coupon rate be on these bonds

N=29

I/Y=3.4%

PV=-$924

PMT=?

FV=1000

COMPUTE PMT = 29.84

29.84/1000 * 2 = 5.97%

If Treasury Bills are currently paying 7% and the inflation rate is 3.8% APPROXIMATE the real return of interest

7%-3.8%= 3.2%

What is the exact real rate for the values above

1.07/1.038 = 3.08%

An investment offers 14% total return over the coming year. The lender thinks the total real return on this investment will only be 9%. What are they expecting the inflation rate to be?

From the Fisher equation

h=1.14/1.09=1.0459

4.6% predicted inflation rate

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All other things being equal are longer or shorter term bonds more affected by changes in interest rates?

Long-term bonds

All other things being equal are bonds with high or low coupon payments more at interest rate risk?

Lower the coupon rate, the bigger the interest rate risk

What should the coupon rate be equal to if a company wants the band to sell at par?

To sell at par, the coupon rate should be equal to the market rate

What is the equation for a "clean price" of a bond?

Clean Price = Dirty Price - Accrued Interest

What's the relationship between the price of a bond and it's Yield To Maturity?

The bond price is the current value of all cash flows from that bond. The YTM is the interest rate we use in valuing the cash flows from the bond.

What effect does the coupon rate have on whether or not a bond is offered at a premium?

A bond will be offered at a premium if the coupon rate is higher than the YTM

What is an unsecured bond called?

A debenture

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