Problem Set week 5

Problem Set #5 1. Quoted market interest rate = r* + IP + MRP + DRP + LP = 2.00% + 2.20% + 2.50% + 2.40% + 0.90% = 10.00% 2. Annual coupon payment = quoted market interest rate * bond's par value = 10% * $1000 = $100 3. FV = $1000 N = 15 years C = $100 r = 10% Bond Price = C* (1-(1+r) -n /r ) + FV/(1+r) n Put the value in the formula above we have price of bond is $1000 4. Using the formular Bond Price = C* (1-(1+r) -n /r ) + FV/(1+r) n C = 0.08 * 1000 = $80 FV = $1000 r = 9% = 0.09 N = 12 years Price of bond ≈ $928.39 5. Interest per bond every 6 months = (annual coupon rate* FV)/2 = (8% * $1000)/2 = $40 6. i. Bond Price = C* (1-(1+r) -n /r ) + FV/(1+r) n C = periodic coupon payment = 0.08 * 1000 = $80  semi-annually = $80/2= $40 FV = $1000 r = 0.09 => semi-annually = 0.045 n = 10 => semi-annually = 20 selling price ≈ $934.96 ii. current yield of the bond = C / selling price

= 80/934.96 ≈ 0.0854 = 8.54% 7. C = $100 FV = $1000 PV = $900 N = 10 years YTM = (C + ((FV - PV) / N)) / ((FV + PV) / 2) Put in all of the values in this formula, we have YTM = 11.58% 8. Yield to maturity is the overall expected return on a bond if it is retained until it reaches its maturity date. Yield to call signifies the return on a bond if it is redeemed by the issuer before its maturity. 9. Types of bonds i. debentures: unsecured bonds that are not backed by specific collateral. Instead, they rely on the creditworthiness and general reputation of the investor for repayment. ii. convertible bonds: bonds that can be converted into a predetermined number of shares of the issuing company's common stock. iii. junk bonds: bonds issued by companies or entities with lower credit ratings. iv. callable bonds: bonds that can be redeemed by the issuer before their maturity date. 10. - If the company has taken on significant debt relative to its earnings and assets, it may raise concerns about its ability to meet its financial obligations. - If the company's financial performance has weakened, declining revenues, profitability, or cash flow could lead to a lower credit rating. - Overall deterioration of the pharmaceutical industry, such as increased competition, patent expirations, or regulatory hurdles, it can impact the company's ability to generate stable cash flows and meet its financial commitments.