# Jackson corporation’s bonds have 12 years remaining to maturity.

Problem 5.1 bond valuation with annual payments

Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a \$1,000 par value, and the coupon interest rate in 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds?

5.4 determinant of interest rates

The real risk-free rate of interest is 4%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3 year Treasury securities?

5.9 bond valuation and interest rare risk

The Garraty Company has two bond issues outstanding. Both bonds pay \$100 annual interest plus \$1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year. – What will be the value of each of these bonds when the going rate of interest is (1) 5%, (2) 8%, and (3) 12%? Assume that there is only one more interest payment to be made on bond S. – Why does the longer-term (15 year) bond fluctuate more when interest rates change than does the short term bond (1 year)?

5.13 yield to maturity and current yield

You just purchased a bond that matures in 5 years. The bond has a face value of \$1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond’s yield to maturity?

BA/350 BA 350 BA350 Week 6 Problem Solution (***** 100% Correct ******)

Question 5.1 All Definition (A to N )

Question 5-1  Define each of the following term:

A. Bond; Treasury bond; corporate bond; municipal bond; foreign bond.

B. Par value; maturity date; coupon payment; coupon interest rate.

C. Floating-rate bond; zero coupon bond; original issue discount bond (oid).

D. Call provision; redeemable bond; sinking fund.

E. Convertible bond; warrant; income bond; indexed, or purchasing power, bond.

F. premium bond; discount bond.

G. current yield (on a bond); yield to maturity (YTM); yield to call (YTC).

H. indentures; mortgage bond; debenture; subordinated debenture.

I. development bond; municipal bond insurance; junk bond; investment-grade bond.

J. real risk-free rate of interest, r*; nominal risk-free rate of interest, rRF

K. inflation premium (IP); default risk premium (DRP); liquidity; liquidity premium (LP)

L. interest rate risk; maturity risk premium (MRP); reinvestment rate risk.

M. term structure of interest rates; yield curve.

N. “normal” yield curve; inverted (“abnormal”) yield curve.

BA350 Week 6 Question 5.1

BA350 BA/350 BA 350 Week 6 Problem (***** 100% Correct ******)

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