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FIN 317 Problem Set #3 Due: October 30, 2017 Please report answers with at least 2 decimal places. Please circle your answers. 1. You borrowed
3)Consider a bond with 16 years left to maturity. It is selling for $985.45 and has a 6.35% semi-annual coupon
.
a.What yield to maturity is the bond offering?
b.Suppose the bond is callable in 6 years with a call price equal to the par value plus 2 semi-annual interest payments. What is the yield to call?
4) Quick Loans (a pay day loan company) offers you "three for four or 1 knock on your door." This means you get $3 today and have to repay $4 when you
get your paycheck in one month (or else you get the "knock on your door," which we can assume will be unpleasant). [Note: Large numbers are OK.]
a.If you were brave enough to ask, what APR would the lender (Quick Loans) say you were paying?
b.What is the effective annual return the lender (Quick Loans) earns on this lending business (the lender loans $3 today and gets $4 in one time period)?
5) A 4.25% coupon bond with 15 years left to maturity is priced to offer a 5.5% yield to maturity. You believe that in one year, the yield to maturity will be
7.125%. If this occurs, then what would be the return of the bond in dollars (i.e., if you buy it now and sell it in one year, then how much money would you get)?
a. Notes:
i.you are not being asked for a return percentage; rather you need to calculate the amount of money you will receive in dollars;
ii.assume interest payments are semiannual;
iii.use the following definition for return: the return is equal to the change in value plus any interest, i.e. Return of bond in dollars = change in value plus interest earned in a year. [Please set your calculator to display 4 decimal places.]
6) A 20-year corporate bond has a par value of $2000 and a 7.5% annual coupon rate. Assume that your required rate of return is 10% and that you plan to hold onto this bond for 6 years. You and the market have expectations that in 6 years the yield-to-maturity for this bond (or another
bond with similar risk and maturity) will be 9%. How much are you willing to pay for this bond today? (Hint: You will need to know how much you can sell the bond for at the end of 6 years. Then you must use this value to determine how much you would be willing to pay for it today! So, Step 1 is to find the value of the bond in 6 years -> N=14,...)
