8) Absalom Motors\'s 15% coupon rate, semiannual payment, $1,000 par value bonds
ID: 2672410 • Letter: 8
Question
8) Absalom Motors's 15% coupon rate, semiannual payment, $1,000 par value bonds that mature in 20 years are callable 4 years from now at a price of $1,050. The bonds sell at a price of $1,205.42, 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.%
9) Assume that the real risk-free rate, r*, is 2% and that inflation is expected to be 7% in Year 1, 5% in Year 2, and 3% thereafter. Assume also that all Treasury securities are highly liquid and free of default risk. If 2-year and 5-year Treasury notes both yield 10%, what is the difference in the maturity risk premiums (MRPs) on the two notes; that is, what is MRP5 minus MRP2? Round your answer to two decimal places.
%
Explanation / Answer
Coupon Rate = 15% Par Value (or) Face Value of the bond = $1,000 Number of years to maturity =20 years Current Price of the bond = $1,205.42 Calculating Interest Rates of the bond : Calculating Yield to Maturity (Rate): (Using "Ms-Excel" Rate Function): Number of Periods to Maturity (Nper) 20*2 Semi-annual Coupon Payment [$1,000 * 15% / 2] -75 Current Market Price of the bond (PV) 1,205.42 Par Value (or) Face value of the bond (FV) -1000 Semi-Annual Interest Rate (Rate) 5.10% Annual Interest Rate (Rate) [5.10 * 2] 10.20% The best estimate of nominal interest on new bonds = 10.20%
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