Homework 3 - Chapters 6 and 7

1.You read in The Wall Street Journal that 30-day T-bills are currently yielding 2%.Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums on a 1 year bond:

Liquidity premium = 3%.

Maturity risk premium = 1.5%.

Default risk premium = 1.2%.

On the basis of these data, what is the long term treasury bond rate?

2.A Treasury bond that matures in 10 years has a yield of 4.5 percent.A 10-year corporate bond has a yield of 6 percent.Assume that the liquidity premium on the corporate bond is 0.6 percent.What is the default risk premium on the corporate bond?

3.You read in The Wall Street Journal that 30-day T-bills are currently yielding 0.5%.Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums on a 1 year bond:

Liquidity premium = 0.5%.

Maturity risk premium = 0.5%.

Default risk premium = 1%.

On the basis of these data, what is the short term corporate bond rate?

4.You read in The Wall Street Journal that 30-day T-bills are currently yielding 1%.Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums on a 10 year bond:

Liquidity premium = 1%.

Maturity risk premium = 1%.

Default risk premium = 2%.

On the basis of these data, what is the long term corporate bond rate?

5.The Carter Company's bonds mature in 6 years have a par value of $1,000 and an annual coupon payment of $70.The yield to maturity for the bonds is 9%.What is the price of these bonds?

6.The Carter Company's bonds mature in 8 years have a par value of $1,000 and a semiannual coupon payment of $60.The yield to maturity for the bonds is 7%.What is the price of these bonds?

7.A corporate bond has a face value of $1,000, and 8 percent semiannual coupon.The bond matures in 8 years and sells at a price of $1,090.What is the bond's yield to maturity?

8.Consider the same bond in question 7.The bond can be called in 4 years at a call price of $1,040.What is the bond's yield to call?