Problem 1) Data Corporation has a bond issue outstanding with an annual coupon rate of 7 percent and 4 years remaining until maturity. The par value of the bond is $1,000. Determine the current value of the bond if present market conditions justify a 14 percent required rate of return. The bond pays interest annually.
Problem 2) Refer to Problem #1. Suppose the bond had a semiannual coupon. What would its current value be?
Problem 3) Refer to Problem #1. Assume an annual coupon but 20 years remaining to maturity. What is the current value under these conditions?
Problem 4) Refer to Problem #3. What is the bond's current yield?
Problem 5) Big Corporation's 12 percent coupon rate, semiannual payment, $1,000 par value bonds which mature in 20 years are callable at a price of $1,100 five years from now. The bonds sell at a price of $1,300, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of Big's nominal interest rate on the new bonds?
Problem 6) Refer to Problem #5. Given the same information, what is the rate of return on 1-year T-bonds?
Problem 7) Safe Products has a bond issue outstanding with 8 years remaining to maturity, a coupon rate of 10 percent with interest paid annually, and a par value of $1,000. If the current market price of the bond issue is $814.45, what is the yield to maturity, rd?
Problem 8) You have determined the following data for a given bond: Real risk-free rate (r*)=3%, inflation premium=8%, default risk premium=2%, liquidity premium=2%, and maturity risk premium=1%. What is the nominal risk-free rate, rRF?
Problem 9) Assume that a 3-year Treasury note has no maturity risk nor liquidity risk and that the real risk-free rate of interest falls to 2 percent. A 3-year T-note carries a yield to maturity of 12 percent. If the expected inflation rate is 12 percent for the coming year and 10 percent the year after, what is the implied expected inflation rate for the third year?
Problem 10) Assume that the real risk-free rate is 2 percent that the expected inflation rate during Year 2 is 3 percent, and that 2-year T-bonds yield 5.5 percent. If the maturity risk premium is zero, what is the inflation rate during Year 1?