problem1. Compute yield on a municipal and corporate bond with ten years to maturity. Inflation premium is expected at the rate of 0.02% per year. Municipal bonds trade infrequently and require a premium of 1.0% and the corporate bonds yield additional 0.5%. Due to the current financial crisis, MUNIs must pay 0.5% compensation for the possibility of bankruptcy whereas a corporate bond pays 2.5% for the same risk. Total yield on ten year treasury bonds is 2.3%.
problem2. Compute yield to maturity for a 7%, semi-annual coupon payments bond which has five years left to maturity & is currently trading at $900.
problem3. Compute holding period rate of return for a zero coupon, ten-year bond if it was bought at the time it was issued for $350 and sold 4 years later when the market rate of return was 9.5 %.
problem4. A bond was issued at par, carried a coupon of 6 % and had 20 years to maturity. Coupon payments are made semi annually. What will be the price of this bond three years from the issue date if the issuer is perceived to be less risky eliminating the require for the extra 0.3% in default risk premium?
problem5. Which bond would experience the most change in price when the interest rates went from 8% to 7%? Describe with computations.
a. 10 year 7% coupon bond:
b. 10 year zero coupon bond:
c. $1000 perpetuity
d. 30 year zero coupon bond
problem6. a. Compute YTM & YTC for the following bond:
- Issue date 1-1-00
- Maturity date: 1-1-20
- Today’s date: 1-1-03
- Call protection till 1-1-05
- Call premium= interest for six months
- Coupon rate 7.5% paid yearly
- Current price $934.42