2 If a bond with 30 years to maturity and a coupon rate of 8.2% (paid semi-annua

Question

2 If a bond with 30 years to maturity and a coupon rate of 8.2% (paid semi-annually) is selling for $895, what is the yield to maturity for this bond? Provide a brief description of what the term “yield to maturity” means. (2 pts.)

3. If the bond in #2 above were callable in 5 years at a price of par value plus one year’s interest, what would be the yield-to-call?   Interpret this figure. (2 pts)

4. If the real risk-free rate of interest is 2.8 % and inflation is expected to be 3% in the coming year, 5% in the second year, 6% in the third year, and 3% per year for the next three years after that, what rate of return would you expect on a 6-year Treasury bond if the maturity risk premium is equal to %0.12 per year of maturity. (2 pts.)

5. At the same time as you observe the information in #4 above, you observe that the required yield on a AAA rated corporate bond is 7.65%. Assuming that the liquidity premium for the AAA bond is 0.2%, what is the default risk premium for AAA bonds? (1 pt.)

6) Discuss what bond yield spreads are and why they exist. How do these spreads tend to vary over the business cycle (i.e. during recessions and expansions)? Why is this?

Explanation / Answer

Yield to maturity means the expected return of the bond in market by the investors. This is the return they want for the money they are investing.

We can find it using rate formauel in excel

rate(nper,pmt,pv,fv,type)

nper=30*2=60 since semiannual

pmt=8.2%/2*1000=$41 (semi annual coupon)

pv=-895

fv=1000

type=0

guess=1

=RATE(60,41,-895,1000,,1)=4.62%

YTM=4.62%*2=9.24%

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