1. The real risk-free rate is 4%. Inflation is expected to be 3% this year and 5

Question

1. The real risk-free rate is 4%. Inflation is expected to be 3% this year and 5% during the next 2 years. Assume that the maturity risk premium is zero.

What is the yield on 2-year Treasury securities? Round your answer to two decimal places.
%

What is the yield on 3-year Treasury securities? Round your answer to two decimal places.

%

2. Renfro Rentals has issued bonds that have a 11% coupon rate, payable semiannually. The bonds mature in 19 years, have a face value of $1,000, and a yield to maturity of 9%. What is the price of the bonds? Round your answer to the nearest cent.

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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 4% 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.

%

Jackson Corporation's bonds have 15 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 6%. The bonds have a yield to maturity of 8%. What is the current market price of these bonds? Round your answer to the nearest cent.

$

The real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years. A 2-year Treasury security yields 6%. What is the maturity risk premium for the 2-year security?

%

12. Thatcher Corporation's bonds will mature in 16 years. The bonds have a face value of $1,000 and an 7.5% coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are callable in 5 years at a call price of $1,050. Round your answers to two decimal places.

What is their yield to maturity?
%

What is their yield to call?
%

13. Thatcher Corporation's bonds will mature in 16 years. The bonds have a face value of $1,000 and an 7.5% coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are callable in 5 years at a call price of $1,050. Round your answers to two decimal places.

What is their yield to maturity?
%

What is their yield to call?
%

15. Wilson Wonders's bonds have 7 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%. The bonds sell at a price of $1,095. What is their yield to maturity? Round your answer to two decimal places.

%

Explanation / Answer

1. Yield on 2-year Treasury securities = ((1+4%)^2*(1+3%)*(1+5%))^0.5-1 = 8.15%

Yield on 3-year Treasury securities = ((1+4%)^3*(1+3%)*(1+5%)^2)^(1/3)-1 = 8.50%

2. Price can be calculated in Excel as =PV(9%/2,19*2,-11%*1000/2,-1000). This is equal to $ 1180.50

MRP2 = (1+10%) - ((1+2%)^2*(1+7%)*(1+5%))^0.5 = 1.88%

MRP5 = (1+10%) - ((1+2%)^5*(1+7%)*(1+5%)*(1+4%)^3)^(1/5) = 3.11%

MRP5-MRP2 = 3.11%-1.88% = 1.23%

Current price of Jackson bonds can be calculated in Excel as =PV(8%,15,-6%*1000,-1000). This is equal to $ 828.81

MRP2 = (1+6%)-((1+3%)^2*(1+2%)^2)^0.5 = 0.94%

12/13. Thatcher YTM can be calculated in Excel as =RATE(16*2,-1000*7.5%/2,1100,-1000)*2. This is equal to 6.49%

Thatcher yield to call can be calculated in Excel as =RATE(5*2,-1000*7.5%/2,1100,-1050)*2. This is equal to 6.03%

15. Wilson YTM can be calculated in Excel as =RATE(7,-1000*9%,1095,-1000). This is equal to 7.22%

Hope this helped ! Let me know in case of any queries.

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