Finance 301 bonds (ytm, etc.)

1. The McKeegan Corporation has two different bonds currently

outstanding. Bond M has a face value of $18,000 and matures in 23
years. The bond makes no payments for the first 7 years, then pays
$900 every six months over the subsequent 9 years, and finally pays
$1,200 every six months over the last 7 years. Bond N also has a
face value of $18,000 and a maturity of 23 years; it makes no
coupon payments over the life of the bond. If the required return on
both these bonds is 8 percent compounded semiannually, the
current price of Bonds M and N is _____$ and ____$, respectively
3. River Corp. has 10.1 percent coupon bonds making annual

payments with a YTM of 4.7 percent. The current yield on these
bonds is 7.91 percent. These bonds will mature in _____ years.
4. Seether Co. wants to issue new 19-year bonds for some muchneeded expansion projects. The company currently has 10.7 percent
coupon bonds on the market that sell for $1,050.27, make
semiannual payments, and mature in 19 years. The company should
set a coupon rate of ________ percent on its new bonds if it wants
them to sell at par.
5. Bond J is a 5 percent coupon bond. Bond K is a 12 percent
coupon bond. Both bonds have 8 years to maturity, make
semiannual payments, and have a YTM of 8.5 percent. If interest
rates suddenly fall by 2 percent, the percentage change in price of
Bonds J and K is ____ percent and ____ percent, respectively.
7. Bond X is a premium bond making annual payments. The bond
pays an 14 percent coupon, has a YTM of 10 percent, and has 20
years to maturity. Bond Y is a discount bond making annual
payments. This bond pays a 10 percent coupon, has a YTM of 14
percent, and also has 20 years to maturity. If interest rates remain
unchanged, you would expect that 5 years from now, Bonds X and Y
will be priced at $ and $, respectively. And in 11 years: $ and $.
8. Say you own an asset that had a total return last year of 13.6
percent. If the inflation rate last year was 4.1 percent, your real
return was ____ percent.
9. An investment offers a 10.7 percent total return over the coming
year. Bill Bernanke thinks the total real return on this investment will
be only 2.6 percent. Therefore, Bill believes the inflation rate will be
_______ percent over the next year.

10. Suppose the real rate is 5.6 percent and the inflation rate is 2.3
percent. You would expect to see a rate of _____ percent on a
Treasury bill.
11. If Treasury bills are currently paying 4.1 percent and the inflation
rate is 2.5 percent, the approximate real rate of interest is ____
percent. The exact real rate is ____ percent.
13. Suppose today a 12 percent coupon bond sells at par. Two years
from now, the required return on the same bond is 8 percent. The
coupon rate in two years would be _____ percent and the YTM
would be ____ percent.

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