Question

Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.9 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 3.8 percent. What is the dollar price of the bond?

Suppose the real rate is 1.9 percent and the inflation rate is 3.1 percent. What rate would you expect to see on a Treasury bill?

All answers must be entered as a formula. 

Answer 1

3)	Par/Face value	2000
	Annual Coupon rate	0.049
	Annual coupon	98
	semi-annual coupon	49
	Present Value = Future value/[(1+(r/m))^mt]
	r is the interest rate that is .038.
	m is the compounding period that is 2
	mt is the time period.
	price of the bond = sum of present values of future cash flows
	r/2	0.019
	mt	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26
	future cash flow	49	49	49	49	49	49	49	49	49	49	49	49	49	49	49	49	49	49	49	49	49	49	49	49	49	2049
	present value	48.08636	47.18975	46.30987	45.44639	44.599	43.76742	42.95135	42.15049	41.36456	40.59329	39.8364	39.09362	38.36469	37.64935	36.94735	36.25844	35.58238	34.91892	34.26783	33.62888	33.00184	32.3865	31.78263	31.19002	30.60846	1256.068
	sum of present values	2224.04
	The dollar price of this bond is $2224.04.

4)	1 + nominal interest rate = (1+ real interest rate)*(1+ inflation)
	Inflation rate	0.031
	Real interest rate	0.019
	(1 + nominal interest rate) = (1+.019)*(1+.031)
	(1+ nominal interest rate) = 1.050589
	nominal interest = 1.050589 - 1
	nominal interest = .050589
	The nominal interest rate is 5.0589%.
	You would expect to see a rate of 5.06%
	on the treasury bill.