1,Suppose the interest rate on a 1-year T-bond is 3.0% and that on a 2-year T-bond is 5.0%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.2% for a 2-year bond. What is the equilibrium market forecast for 1-year rates 1 year from now?
2. Silver Streak Inc. has a bond outstanding with 15 years to maturity, a 7% coupon paid semiannually, and a $1,000 par value. The bond has a 6% nominal yield to maturity, but it can be called in 5 years at a price of $1,035. What is the bond’s nominal yield to call?
3.A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?
4.Tidy Co. bonds currently sell for $1,150. They have a 6.35% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,067.50. 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. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds?
5. Blue Moon Corporation's 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the liquidity premium for Blue Moon bonds is LP = 0.5% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) × 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Blue Moons' bonds?
6. Sorell's outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $975. What is the bond's nominal coupon rate?