Corporate Finance Chapter 3
Essay by Frankhidalgo • January 2, 2018 • Coursework • 1,349 Words (6 Pages) • 650 Views
Eric Roldan
Professor Rewal Alonso
Corporate Finance
July 02, 2017
Final Grade: 80%
Chapter 3
Score: 2/4
- Suppose that you buy a two-year 8.1% bond at its face value.
Real Rate of Return = (Coupon Rate – Inflation rate) / (1+Inflation rate) | 1st year Real return | ||||||||
Coupon rate = 0.08 | 0.081 | (1 + nominal rate) = (1 + real rate) x (1 + inflation rate) | |||||||
Inflation rate = 0.03 | 0.031 | (1 + nominal rate) | 1.08100 | ||||||
1st year Real return | Nominal rate | 0.08100 | |||||||
Real Rate of Return | 0.04850 | Nominal rate | 0.08100 | ||||||
Real Rate of Return | 4.84966 | Nominal Rate | 8.1 | ||||||
2st year Real return | |||||||||
2st year Real return | (1 + nominal rate) = (1 + real rate) x (1 + inflation rate) | ||||||||
Real Rate of Return | 0.02854 | (1 + nominal rate) | 1.0810 | ||||||
Real Rate of Return | 2.8544 | Nominal rate | 0.0810 | ||||||
Nominal rate | 0.0810 | 8.1 | |||||||
Nominal Rate | 8.1 | ||||||||
b) Now suppose that the bond is a TIPS. | |||||||||
1st year | 2nd years | ||||||||
Real rate = Coupon rate – Inflation | Real rate = Coupon rate – Inflation | ||||||||
Real rate | 0.05 | Real rate | 0.05 | ||||||
(1 + nominal rate) = (1 + real rate) x (1 + inflation rate) | (1 + nominal rate) = (1 + real rate) x (1 + inflation rate) | ||||||||
(1 + nominal rate) | 1.08255 | (1 + nominal rate) | 1.08255 | ||||||
Nominal rate | 0.08255 | Nominal rate | 0.08255 | ||||||
Nominal rate | 8.255 | Nominal Rate | 8.255 Score: 4/4 |
- The two-year interest rate is 11.0% and the expected annual inflation rate is 5.5%.
- Real rate= 1.11/1.055-1= .0521, or 5.21%
- The real rates no change.
- Nominal rate =1.0521 x 1.075-1= .1310, or 13.10%
Score: 2/4
- In February 2015 Treasury 4 1/4s of 2043 offered a semiannually compounded yield to
- The yield over six months= 2.74/2= 1.37
Score: 4/4
- Assume coupons are paid annually. Here are the prices of three bonds with 10-year
Bond Coupon (%) | Price (%) | Present value | Future value | Nper |
4 | 80.50 | 805 | 1000 | 10 |
6 | 99.50 | 995 | 1000 | 10 |
10 | 130.50 | 1305 | 1000 | 10 |
a- What is the yield to maturity of each bond? Bond Coupon (%) YTM
Bond coupon % | YTM % |
4% | 6.7% |
6% | 6.1% |
10% | 5.9% |
Score: 4/4
- The twenty-year bond yields 6.1% and has a coupon of 8.1%. If this yield to maturity
A Coupon rate | 8.10% |
Nper | 19 |
Yield | 6.10% |
PV | 100 |
FV | |
Price after 1 year = | $ 122.14 |
b. What is the total return to an investor who held the bond over this year?
B Coupon rate | 8.10% |
Nper | 20 |
Yield | 6.10% |
PV | 100 |
FV | |
Price after 1 year = | $ 122.75 |
Total return = | 6.10% |
Score: 4/4
- You have estimated spot rates as follows: r1 = 5.70%, r2 = 6.10%, r3 = 6.40%, r4 =
What are the discount factors for each date (that is, the present value of $1 paid in year t
Year | Discount Factor | Forward Rate |
1 | 0.9461 | |
2 | 0.8883 | 1.0650 |
3 | 0.8302 | 1.1353 |
4 | 0.7744 | 1.2136 |
5 | 0.7231 | 1.2974 |
b-Calculate the PV of the following $1,000 bonds assuming an annual coupon and
Present Value | |
5.70%, two-year bond $ | 992.88 |
5.70%, five-year bond | 960.303 |
10.70%, five-year bond | 1168.406 |
c. What should be the yield to maturity on a five-year zero-coupon bond?
The yield to maturity on a five-year zero-coupon bond is the five-year spot rate, here 6.00%
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