Question

2. A bond matures in 7 years, has a par value of $1,000, and an annual coupon payment of $70. Investors require a return of 8.5%. Calculate the price of the bond. [8 points] 3. A bond is priced at $1,280, has a par value of $1,000, 15 years to maturity, and a $135 annual coupon. The bond is callable in 5 years at $1,050. Calculate the yield to call. [8 points] 4. If 10-year Treasury bonds yield 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, calculate the default risk premium on the corporate bonds. [10 points a. Calculate the yield on a Treasury bill? b. Calculate the default risk premium on the corporate bonds.

Answer 1

Answer to Question 2:

Par Value = $1,000
Annual Coupon = $70
Time to Maturity = 7 years
Required Return = 8.50%

Price of Bond = $70 * PVIFA(8.50%, 7) + $1,000 * PVIF(8.50%, 7)
Price of Bond = $70 * (1 - (1/1.085)^7) / 0.085 + $1,000 * (1/1.085)^7
Price of Bond = $70 * 5.118514 + $1,000 * 0.564926
Price of Bond = $923.22

Answer to Question 3:

Call Value = $1,050
Current Price = $1,280
Time to Call = 5 years
Annual Coupon = $135

Let Annual YTC be i%

$1,280 = $135 * PVIFA(i%, 5) + $1,050 * PVIF(i%, 5)

Using financial calculator:
N = 5
PV = -1280
PMT = 135
FV = 1050

I = 7.45%

Yield to Call = 7.45%