Question 1: (Yield to Call Ex):
Six years ago, The Singleton Company sold a 20 –year bond issue with a 14 percent annual coupon rate and a 9 percent call premium. Today, Singleton called the bond. The bonds originally were sold at their face value of $1,000. Compute the realized rate of return for investors who purchased the bonds when they were issued and who surrender them today in exchange for the call price.
Question 2: (Nominal Interest Rate Ex.):
Lloyd Corporation’s 14 percent coupon rate, semiannual payment, $1,000 par value bonds, that mature in 30 years, are callable 5 years from now at a price of $ 1,050. The bonds sell at a price of $1,353.54, 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 Lloyd’s nominal interest rate on new bonds?
Question 3: (Interest Rate Sensitivity Ex.):
A bond trader purchased each of the following bonds at a yield to maturity of 8 percent. Immediately after she purchased the bonds, interest rates fell to 7 percent. What is the percentage change in the price of each bond after the decline in interest rates? Fill in the following table:
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Price @ 8%
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Price @ 7%
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Percentage Change
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10-year, 10% annual coupon
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10-year zero
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5-year zero
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30-year zero
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$100 perpetuity
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