Concept explainers
a)
To discuss: Discount factor.
a)
Explanation of Solution
Computation of discount factors for each year is as follows:
Formula to compute of discount factors for each year is as follows:
b)
To discuss: Present values.
b)
Explanation of Solution
Compute present values:
(i)
5%, 2-year bond
(ii)
5%, 5-year bond
(iii)
10%, 5-year bond
c)
To discuss: The reason why 10% bond is lower than 5% bond.
c)
Explanation of Solution
Fist compute the yield for these two bonds.
For the 5% bond:
The computation of r using the equation of present value is as follows:
For the 10 % bond:
The yield of a bond is generally based on the current rate at the time of payment and the coupon payment. The 10% bond has a little better amount of its total payments, if the rate of interest is lesser than 5% of the bond Therefore, the yield of 10% bond is marginally lower.
d)
To discuss: The yield to maturity on 5 years zero coupon bond.
d)
Explanation of Solution
The computation of yield to maturity on 5 years zero coupon bond is as follows:
Hence the yield to maturity is 6.10%.
e)
To discuss: The yield to maturity on a 5-year
e)
Explanation of Solution
The calculation of yield to maturity on 5 years’
Formula to compute yield to maturity on 5 years annuity is as follows:
Hence the yield to maturity on 5years annuity is 5.845%.
f)
To discuss: Whether the 5-year bond lie between the yield of five years’
f)
Explanation of Solution
The yield on the five-year note lies amongst yield on a five-year
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Chapter 3 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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