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1. Do all work in Excel. Do not submit Word files or *.pdf files.
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3. Place each problem on a separate spreadsheet tab.
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5. Followthedirectionsin"GuidelinesforDevelopingSpreadsheets."
6. P65NominalinterestratesandyieldcurvesArecentstudyofinflationaryexpectationshasrevealedthattheconsensusamongeconomicforecastersyieldsthefollowingaverageannualratesofinflationexpectedovertheperiodsnoted(Note:Assumethattheriskthatfutureinterestratemovementswillaffectlongermaturitiesmorethanshortermaturitiesiszero;thatis,assumethatthereisnomaturityrisk.)
7. Period Averageannualrateofinflation
8. 3months5%
9. 2years6
10. 5years8
11. 10years8.5
12. 20years9
13. a.Iftherealrateofinterestiscurrently2.5%,findthenominalrateofinterestoneachofthefollowingU.S.Treasuryissues:20-yearbond,3-monthbill,2-yearnote,and5-yearbond.
14. b.Iftherealrateofinterestsuddenlydroppedto2%withoutanychangeininflationaryexpectations,whateffect,ifany,wouldithaveonyouranswersinparta?Explain.
15. c.Usingyourfindingsinparta,drawayieldcurveforU.S.Treasurysecurities.Describethegeneralshapeandexpectationsreflectedbythecurve.
16. d.Whatwouldafolloweroftheliquiditypreferencetheorysayabouthowthepreferencesoflendersandborrowerstendtoaffecttheshapeoftheyieldcurvedrawninpartc?Illustratethateffectbyplacingonyourgraphadottedlinethatapproximatestheyieldcurvewithouttheeffectofliquiditypreference.
17. e.Whatwouldafollowerofthemarketsegmentationtheorysayaboutthesupplyanddemandforlong-termloansversusthesupplyanddemandforshort-termloansgiventheyieldcurveconstructedforpartcofthisproblem?
18. P611BondpricesandyieldsAssumethattheFinancialManagementCorporations$1,000-par-valuebondhada5.700%coupon,maturesonMay15,2023,hasacurrentpricequoteof97.708, andhasayieldtomaturity(YTM)of6.034%.Given thisinformation,answerthefollowingquestions:
19. a.Whatwasthedollarpriceofthebond?
20. b.Whatisthebondscurrentyield?
21. c.Isthebondsellingatpar,atadiscount,oratapremium?Why?
22. d.ComparethebondscurrentyieldcalculatedinpartbtoitsYTMandexplain
23. P6-17BondvalueandchangingrequiredreturnsMidlandUtilitieshasoutstandingabondissuethatwillmaturetoits$1,000parvaluein12years.Thebondhasacouponinterestrateof11%andpaysinterestannually.
24. a.Findthevalueofthebondiftherequiredreturnis(1)11%,(2)15%,and(3)8%.
25. b.Plotyourfindingsinpartaonasetofrequiredreturn(xaxis)marketvalueofbond(yaxis)axes.

c.Useyourfindingsinpartsaandbtodiscusstherelationshipbetweenthecouponinterestrateonabondandtherequiredreturnandthemarketvalueofthebondrelativetoitspar valued.Whattwopossiblereasonscouldcausetherequiredreturntodifferfromthecouponinterestrate?

P618 Bond value and time: Constant required returns Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest annually. The required return is currently 14%, and the company is certain it will remain at 14% until the bond matures in 15 years. a. Assuming that the required return does remain at 14% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, and (6) 1 year to maturity. b. Plot your findings on a set of time to maturity (x axis)market value of bond (y axis) axes constructed similarly to Figure 6.5 on page 252. c. All else remaining the same, when the required return differs from the coupon interest rate and is assumed to be constant to maturity, what happens to the bond value as time moves toward maturity? Explain in light of the graph in part b.

P622 Yield to maturity Each of the bonds shown in the following table pays interest annually.

Bond Par value Coupon interest rate Years to maturity Current value A $1,000 9% 8 $ 820 B 1,000 12 16 1,000 C 500 12 12 560 D 1,000 15 10 1,120 E 1,000 5 3 900

a. Calculate the yield to maturity (YTM) for each bond. b. What relationship exists between the coupon interest rate and yield to maturity and the par value and market value of a bond? Explain.