Current Yield for Annual Payments

1. Heath Foods’s bonds have 11 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8%. They pay interest annually and have a 7% coupon rate. What is their current yield? Round your answer to two decimal places.

2. Default Risk Premium

A Treasury bond that matures in 10 years has a yield of 4%. A 10-year corporate bond has a yield of 10%. Assume that the liquidity premium on the corporate bond is 0.7%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.

3. Yield to Call and Realized Rates of Return

Six years ago, Goodwynn & Wolf Incorporated sold a 17-year bond issue with a 12% annual coupon rate and a 7% call premium. Today, G&W called the bonds. The bonds originally were sold at their face value of $1,000. Compute the realized rate of return for investors who purchased the bonds when they were issued and who surrender them today in exchange for the call price. Round your answer to two decimal places.

4. Bond Yields and Rates of Return A 15-year, 14% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,075. The bond sells for $1,050. (Assume that the bond has just been issued.)

What is the bond’s yield to maturity? Round your answer to two decimal places.

%

What is the bond’s current yield? Round your answer to two decimal places.

%

What is the bond’s capital gain or loss yield? Loss should be indicated with minus sign. Round your answer to two decimal places.

%

What is the bond’s yield to call? Round your answer to two decimal places.

%

5. You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond’s yield to maturity? Round your answer to two decimal places.

6. Current Yield with Semiannual Payments

A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond’s current yield? Round your answer to two decimal places.

7. Yield to Call, Yield to Maturity, and Market Rates

Absalom Motors’s 14% coupon rate, semiannual payment, $1,000 par value bonds that mature in 15 years are callable 5 years from now at a price of $1,050. The bonds sell at a price of $1,353.54, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of the nominal interest rate on new bonds? Round your answer to two decimal places.

8. Determinants of Interest Rates

The real risk-free rate is 4%. Inflation is expected to be 3% this year, 4% next year, and then 4% thereafter. The maturity risk premium is estimated to be 0.0003 x (t – 1), where t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury security? Round your answer to two decimal places.

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