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Fin 534

In: Business and Management

Submitted By tidoconner
Words 792
Pages 4
(5–1)
Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%.
The bonds have a yield to maturity of 9%. What is the current market price of these bonds? 0 1 2 3 4 5 6 7 8 9 10 11 n=12
PV 80 80 80 80 80 80 80 80 80 80 80 80 Par Vaule= $1,000.00

Coupon interest rate = 8%
Par value = $1,000.00
Payment = Par value x coupon rate
Payment = $1,000.00 x 0.08
Payment = $80.00
Yield to maturity = 9%

The current market price of the Jackson Corporation's bonds are calculated as follows.
=PV(Rate, Nper, Payment, FV, Type)
=PV(9%,12,80,1000,0)
[pic]

The current market price of Jackson Corporation's bonds is $928.39.

(5–3)
Heath Foods’s bonds have 7 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their current yield?

0 1 2 3 4 5 6 n= 7
PV 90 90 90 90 90 90 90 Par Vaule= $1,000.00

Coupon interest rate = 9%
Par value = $1,000.00
Payment = Par value x coupon rate
Payment = $1,000.00 x 0.09
Payment = $90.00
Yield to maturity 8%

The current yield for Heath Food's bond is calculated as follows.
Current Yield=current payment/current price
Current Yield = $90.00/Present Value
=PV(Rate, Nper, Payment, FV, Type)
=PV(8%,7,90,1000,0)
[pic]
Current Yield= $90.00/$1052.06
Current Yield= [pic]
Current Yield = 8.55%
Heath Food's bond current yield is 8.55%
(5–5)
A Treasury bond that matures in 10 years has a yield of 6%. A 10 year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premium on the corporate bond?
Corporate Bond:
I=9%
0 1 2 3 4 5 6 7 8...

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