Question 1

You are considering an investment in a U.S. Treasury bond but you

are not sure what rate of interest it should pay. Assume that the real
risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the
maturity risk premium is 2.5%; and, the default risk premium for
AAA rated corporate bonds is 3.5%. What rate of interest should the
U.S. Treasury bond pay? What rate of interest should the U.S.
corporate bond pay?
Real Risk-free Rate: 1%
Inflation: 1.5%
Maturity Risk Premium: 2.5%
Default Risk-free Rate: 3.5%
Treasury Bond: 1%+2.5%+3.5% = 7%
Corporate Bond: 1%+1.5%+2.5%+3.5% = 8.5%
Question 4
Given the following information on a bond:
Coupon rate = 9%; Current yield = 9.62%; Call premium = 12.25%;
Par value = RM1,000; Years to call = 6 years; Years to maturity = 11
years.
If the bond pays coupons semi-annually, compute its yield-to-call
(YTC).
Periodic Coupon Interest Payment: RM1000 x 9% = RM90 (I)
Current Yield = Interest Payment ÷ Current Market Price
Current Market Price = Interest Payment ÷ Current Yield
= 90/9.62%
= RM935.55
Call Price = 1000 x (1000 x 12.25%) = RM1122.50
1122.5−935.55
45+
12
Yield-to-call = ≈ 0.0589/5.89% semi-annually
1122.5+935.55
2
≈ 11.78% annually

Financial Calculator:
Function Value
N 12
PV -935.55
PMT 45
FV 1122.5
CPT I/Y 11.99%