Question

7. Currently, Bruner Inc.'s bonds sell for $1.250. They pay a S120 annual coupon, have a 15-year maturity, and a $1.000 pa value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.) 8. Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call? 9. Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)? 10. Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell? BONUS QUESTION 11. Your sister turned 35 today, and she is planning to save $7,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that's expected to provide a return of 7.5% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year. Page 2

Answer 1

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YTM Step 1 Enter Step 2 Press Step 3 Enter Step 4 Press Step 5 Enter Step 6 Press Step 7 Enter Step 8 Press Step 9 Press Step 10 Press 15 N -1250 PV 1000 FV 120 PMT CPT I/Y YTC 5 Ν -1250 PV 1050 FV 120 PMT CPT 1/Y Rate of return 8.91% 6.81% Difference -2.10% =6.81%-8.91%

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