11.The 14-year, $1,000 par value bonds of Waco Industries pay 8 percent interest

Question

11.The 14-year, $1,000 par value bonds of Waco Industries pay 8 percent interest annually. The market price of the bond is $935, and the market's required yield to maturity on a comparable-risk bond is 10 percent.   (a ) compute the bond's yield maturity. (b) Determine the value of the bond to you given the market's required yield to maturity on a comparable-risk bond? c) Should you purchase the bond?

12. What should you expect the nominal rate of interest to be if the real rate is 4.2 percent and the expected inflation is 7.2 percent?

The nominal rate of interest would be ____ % (Round to two decimal place)

Explanation / Answer

11)

Yield to maturity

r = 8.83%

Yield to maturity = 8.83%

Bond value Given the current market rate of 10.000% for a similar bond, a bond with a face value of $1,000.00 and paying a coupon rate of 8.000% (compounding Annually), should be selling for $852.67 (selling at a discount).  

No the bond should not be purchased as the price is high. The price should be $852.67

12)

Given an inflation rate of 7.2% and a real interest rate of 4.2%, calculate the nominal interest rate:

The relation between a nominal interest rate (n), inflation (i), and the real rate of interest (r) is shown in the following equation:
1 + n = (1 + i)(1 + r)

Solving for n, we get:
  1 + n  =  (1 + 0.072)(1 + 0.042)

  1 + n  =  (1.072)(1.042)

  1 + n  =  1.117024

  n  =  1.117024 - 1

  n  =  0.11702

Convert Nominal Interest Rate to a Percentage - Multiply Nominal rate by 100%:
Nominal Interest Rate * 100% = 0.11702 * 100%
Nominal Rate of Interest = 11.7% - See more at: http://www.mathcelebrity.com/inflation.php?nir=&i=7.2&rri=4.2&pl=Calculate#sthash.kcd1mhod.dpuf

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