Your homework assignment for this week's lecture is on Bonds, from Chapters 14, 15, and 16
You are to work on 10 problems.
Due date: Saturday, July 12, by 11:59 pm
Chapter 14: 10, 11, 12, 14, 16
Chapter 15: 7, 11, 14
Chapter 16: 8 and 12
SOLUTIONS
Chapter 14:
10. a. | Zero coupon | 8% coupon | 10% coupon | Current prices | $463.19 | $1,000.00 | $1,134.20 | | | | | b. Price 1 year from now | $500.25 | $1,000.00 | $1,124.94 | Price increase | $ 37.06 | $ 0.00 | − $ 9.26 | Coupon income | $ 0.00 | $ 80.00 | $100.00 | Pre-tax income | $ 37.06 | $ 80.00 | $ 90.74 | Pre-tax rate of return | 8.00% | 8.00% | 8.00% | Taxes* | $ 11.12 | $ 24.00 | $ 28.15 | After-tax income | $ 25.94 | $ 56.00 | $ 62.59 | After-tax rate of return | 5.60% | 5.60% | 5.52% | | | | | c. Price 1 year from now | $543.93 | $1,065.15 | $1,195.46 | Price increase | $ 80.74 | $ 65.15 | $ 61.26 | Coupon income | $ 0.00 | $ 80.00 | $100.00 | Pre-tax income | $ 80.74 | $145.15 | $161.26 | Pre-tax rate of return | 17.43% | 14.52% | 14.22% | Taxes** | $ 19.86 | $ 37.03 | $ 42.25 | After-tax income | $ 60.88 | $108.12 | $119.01 | After-tax rate of return | 13.14% | 10.81% | 10.49% | * In computing taxes, we assume that the 10% coupon bond was issued at par and that the decrease in price when the bond is sold at year end is treated as a capital loss and therefore is not treated as an offset to ordinary income.
** In computing taxes for the zero coupon bond, $37.06 is taxed as ordinary income (see part (b)); the remainder of the price increase is taxed as a capital gain.
11. a. On a financial calculator, enter the following: n = 40; FV = 1000; PV = –950; PMT = 40
You will find that the yield to maturity on a semi-annual basis is 4.26%. This implies a bond equivalent yield to maturity equal to: 4.26% * 2 = 8.52%
