Finance Exercises 6.1 Yield Curves and 6.2. Bond Valuation
Question # 00029588
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Updated on: 10/28/2014 12:45 AM Due on: 10/28/2014
Exercise 6.1. Yield Curves
The following yield data on three U.S. Treasury securities, each having a different
maturity, are measured at three points in time.
Yield %
Time to Maturity 5 Years Ago 2 Years Ago Today
6 months 10.00 9.5 15.2
1 year 10.75 9.6 15.0
5 years 11.50 9.7 13.0
10 years 12.00 9.8 12.5
20 years 13.50 9.9 11.0
a. On the same set of axes, draw the yield curve at each of the points in time given.
b. Describe each curve in part a as to its general shape (downward sloping, flat, upward sloping), and discuss the general interest rate expectations existing at each point in time.
Exercise 6.2. Bond Valuation
a. Marigold Merchants has an outstanding issue of $1,000 par value bonds with an 8% coupon interest rate. The issue pays interest annually and has 15 years remaining to its maturity date. Bonds of similar risk are currently yielding a 10% rate of return. What is the value of these Marigold Merchants bonds?
Is the bond selling at a discount or premium, and why?
b. Marigold Merchants also has an outstanding issue of $1,000 par value bonds with a 12% interest rate. The issue pays interest semiannually and has 10 years remaining to maturity. Bonds of similar risk are currently selling to yield a 10% rate of return. What is the value of these Marigold Merchants bonds?
Is the bond selling at a discount or premium, and why?
The following yield data on three U.S. Treasury securities, each having a different
maturity, are measured at three points in time.
Yield %
Time to Maturity 5 Years Ago 2 Years Ago Today
6 months 10.00 9.5 15.2
1 year 10.75 9.6 15.0
5 years 11.50 9.7 13.0
10 years 12.00 9.8 12.5
20 years 13.50 9.9 11.0
a. On the same set of axes, draw the yield curve at each of the points in time given.
b. Describe each curve in part a as to its general shape (downward sloping, flat, upward sloping), and discuss the general interest rate expectations existing at each point in time.
Exercise 6.2. Bond Valuation
a. Marigold Merchants has an outstanding issue of $1,000 par value bonds with an 8% coupon interest rate. The issue pays interest annually and has 15 years remaining to its maturity date. Bonds of similar risk are currently yielding a 10% rate of return. What is the value of these Marigold Merchants bonds?
Is the bond selling at a discount or premium, and why?
b. Marigold Merchants also has an outstanding issue of $1,000 par value bonds with a 12% interest rate. The issue pays interest semiannually and has 10 years remaining to maturity. Bonds of similar risk are currently selling to yield a 10% rate of return. What is the value of these Marigold Merchants bonds?
Is the bond selling at a discount or premium, and why?
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Rating:
5/
Solution: Finance Exercises 6.1 Yield Curves and 6.2. Bond Valuation Solution