1)The Petit Chef Co. has 7 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments and have a par value of $1,000. If the bonds currently sell for $1,038.50, what is the YTM?

a) Please write down an equation to solve for YTM.

b) How do you use the Excel function YIELD(Settlement, Maturity, Rate, Pr, Redemption, Frequency) or RENDEMENT.TITRE() in the French version to calculate YTM? What should you fill in for Settlement, Maturity, Rate, Pr, Redemption, Frequency respectively?

Please find below the description for the inputs of YIELD(Settlement, Maturity, Rate, Pr, Redemption, Frequency).

Settlement The security's settlement date.

Maturity The security's maturity date.

Rate The security's annual coupon rate.

Pr The security's price per $100 face value.

Redemption The security's redemption value per $100 face value.

Frequency The number of coupon payments per year. For annual payments, frequency = 1; for semiannual, frequency = 2; for quarterly, frequency = 4.

Note that Dates should be entered by using the DATE function. For example, use DATE(2008,5,23) for the 23rd day of May, 2008.

2) Parkway Void Co. issued 15-year bonds two years ago at a coupon rate of 5.4 percent. The bonds make semiannual payments. If these bonds currently sell for 106 percent of par value, what is the YTM?

a) Please write down an equation to solve for YTM.

b) How do you use the Excel function YIELD(Settlement, Maturity, Rate, Pr, Redemption, Frequency) or RENDEMENT.TITRE() in the French version to calculate YTM? What should you fill in for Settlement, Maturity, Rate, Pr, Redemption, Frequency respectively?

Please find below the description for the inputs of YIELD(Settlement, Maturity, Rate, Pr, Redemption, Frequency).

Settlement The security's settlement date.

Maturity The security's maturity date.

Rate The security's annual coupon rate.

Pr The security's price per $100 face value.

Redemption The security's redemption value per $100 face value.

Frequency The number of coupon payments per year. For annual payments, frequency = 1; for semiannual, frequency = 2; for quarterly, frequency = 4.

Note that Dates should be entered by using the DATE function. For example, use DATE(2008,5,23) for the 23rd day of May, 2008.

3) How can you estimate a firms cost of debt if this firm has no bond being issued?

4) The Dunley Corp. plans to issue 5-year bonds with YTM=4.5%. It believes the bonds will have a BBB rating. Given the following information:

Assuming an expected 50% loss rate in the event of default during average economic times. If it were a recession, assuming the bond yield will increase by 20% and the expected loss rate is 71% at that time.

a) Estimate Dunleys cost of debt adjusted for default risk during average economic times.

b)Redo your estimation for recessions.

Source: "Corporate Defaults and Recovery Rates, 1920-2011," Moody's Global Credit Policy, February 2012. *Average rates are annualized based on a 10-year holding period; recession estimates are based on peak annual rates