Appendix A Solutions to Self-Test Questions and Problems A-7

f. T 9! r* # IP 9 # MRP 9

7.3%! 3% # IP 9 # 0.8%

IP 9! 3.5%

3.5%! (3 $ 2% # 5 $ 4% # X)/9

31.5%! 6% # 20% # X

5.5%! X

X! Inf lation in Year 9! 5.5%

T 1! 6%; T 2! 6.2%; T 3! 6.3%; MRP! 0

a. Yield of 1-year security 1 year from now is calculated as follows:

2 $ 6.2%! 6% # X

12.4%! 6% # X

6.4%! X

b. Yield of 1-year security 2 years from now is calculated as follows:

3 $ 6.3%! 2 $ 6.2% # X

18.9%! 12.4% # X

6.5%! X

c. Yield of 2-year security 1 year from now is calculated as follows:

3 $ 6.3%! 6% # 2X

18.9%! 6% # 2X

12.9%! 2X

6.45%! X

Chapter 7

a. Pennington’s bonds were sold at par; therefore, the original YTM equaled the

coupon rate of 12%.

b. VB! (^) #
t! 1
50
__$120/2
(^)! 1 # 0.10____ 2 "
t

__$1,000

(^)! 1 # 0.10____ 2 "
50
With a! nancial calculator, input the following: N! 50, I/YR! 5, PMT! 60,
FV! 1000, and PV!? Solve for PV! $1,182.56.
c. Current yield! Annual coupon payment/Price
! $120/$1,182.56
! 0.1015! 10.15%
Capital gains yield! Total yield " Current yield
! 10% " 10.15%! "0.15%
Total return! 10%
d. With a! nancial calculator, input the following: N! 13, PV! "916.42, PMT! 60,
FV! 1000, and rd/2! I/YR!? Calculator solution! rd/2! 7.00%; therefore,
rd! YTM! 14.00%.
Current yield! $120/$916.42! 13.09%
Capital gains yield! 14% " 13.09%! 0.91%
e. The following time line illustrates the years to maturity of the bond:
1/1/08 7/1/08 1/1/09 7/1/09 12/31/14
3/1/08

1/1/10

...

ST-3ST-3

ST-2ST-2