2. Wine and Roses, Inc. offers a 6.0 percent coupon bond with semiannual payment

Question

2.

Wine and Roses, Inc. offers a 6.0 percent coupon bond with semiannual payments and a yield to maturity of 6.91 percent. The bonds mature in 12 years. What is the market price of a $1,000 face value bond?

4. The Lo Sun Corporation offers a 6.0 percent bond with a current market price of $788.50. The yield to maturity is 8.40 percent. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?

5.

A bond that pays interest annually yields a rate of return of 6.75 percent. The inflation rate for the same period is 2 percent. What is the real rate of return on this bond?

2.00 percent

4.66 percent

8.75 percent

3.38 percent

1.05 percent

Explanation / Answer

2)

coupon rate per period = annual coupon rate/no of periods in a year = 6%/2 = 3%

Price of bond = C * [1-(1+r)^-n]/r + F/(1+r)^n

where

C = coupon amount per period = 3% * 1000 = 30

r = rate per period

n= number of periods

F= facevalue

=>

Price = 30 * [1-(1+(6.91%/2))^-24]/(6.91%/2) + 1000/(1+6.91%/2)^24

   = $926.59

4)

similarly

788.50 = 30 * [1-(1+8.40%/2)^-n]/(8.40%/2) + 1000/(1+8.40%/2)^n

solving for n

n = 16.38 years

5)

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

where
r= nominal rate of return
R= real rate of return
i = inflation rate

=>

(1+R) = (1+6.75%)/(1+2%)

Real rate of return = 4.66%

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