Please, show all your work. Good Luck!

Problem points$]$:

Kay Corporation's $5-$year bonds yield $6\mathrm{.}20\%.$ The real risk$-$free rate is $r^{*}=2\mathrm{.}5\%,$ the inflation premium

for $5-$year bonds is $IP=1\mathrm{.}50\%,$ the default risk premium for Kay's bonds is DRP $=1\mathrm{.}30\%$ versus zero

for T$-$bonds, and the maturity risk premium for all bonds is found with the formula MRP $=(t-1)0\mathrm{.}1\%,$

where $t=$ number of years to maturity. What is the liquidity premium $($LP$)$ on Kay's bonds?

Problem points$]$:

Moerdyk Corporation's bonds have a $15-$year maturity, a $7\mathrm{.}25\%$ semiannual coupon, and a par value of

$$1,000.$ The going annual interest rate $(r_d)$ is $6\mathrm{.}20\%.$ What is the bond's price?

Problem points$]$:

Taussig Corp.$\text{'}$s bonds currently sell for $$1,150.$ They have a $6\mathrm{.}35\%$ annual coupon rate and a $20-$year

maturity, but they can be called in $5$ years at $$1,067\mathrm{.}50.$ Assume that no costs other than the call premium

would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with

rates expected to remain at current levels on into the future. Calculate the yield to maturity $(YTM=r_D)$

and the yield to call $($YTC$).$ Under these conditions, what rate of return should an investor expect to earn

if he or she purchases these bonds?

Problem points$]$:

Miller Corporation has a premium bond making semiannual payments. The bond pays an $8$ percent

coupon, has a YTM of $6$ percent, and has $13$ years to maturity. The Modigliani Company has a discount

bond making semiannual payments. The bond pays a $6$ percent coupon and has a YTM of $8$ percent, and

also has a $13$ years maturity. Assume a face value of $$1,000$ for both bonds.

$($a$)$ If interest rates remain unchanged, what do you expect the price of these bonds to be $1$ year from

now? One day before maturity? $[0\mathrm{.}5$ points$]$

$($b$)$ Suppose the YTM increases $1$ percent for each of the bonds $(7$ percent and $9$ percent, respectively$).$

Calculate the Holding Period Yield of the one$-$year investment for each of the bonds $($from today

to one year from today$).$

Note: Holding Period Yield is the total effective annual return for the investor that buys the bond today

and sells the bond in one year, given the change in interest rates. The return can be decomposed in the

income component $($current yield$)$ and the capital gain component $($capital gain yield$).[0\mathrm{.}5$ points$]$