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Hi Sir,
Crockett Corporation’s 5-year bonds yield 6.35%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 3.60%, the default risk premium for Crockett’s bonds is DRP = 1.00% versus zero for T-bonds, the liquidity premium on Crockett’s bonds is LP = 0.90% 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 inflation premium (IP) is built into 5-year bond yields?
a. 0.68%
b. 0.75%
c. 0.83%
d. 0.91%
e. 1.00%
bBasic equation: r = r* + IP + MRP + DRP + LP
rCrockett Not needed in this problem 6.35%
LP Not needed in this problem 0.90%
DRP Not needed in this problem 1.00%
rT-bond Required data 4.75%
r* Required data 3.60%
Years to maturity Required data 5
MRP = (t – 1) × (0.1) = 0.40%
IP = rT-bond ? r* ? MRP 0.75%why is it that if i use the 6.35% = 1+3.6+0.4+0.9+IP
i didnt get the same answer? i got 0.45%Another doubt ..
A 20yr 9% semi annual coupon bond with a par value of $1000 may be called in 8years at a premium of 12%. The bond sells at $1260
iv) If a friend offers to sell you this bond at $1200, would you take up the offer?
(( part i it asked the YTM, i found out its 6.63%
part ii cap/gain loss yield, my answer is 0.51% loss
part iii YTC, 6.04% ))Your first question is not in the F9 syllabus at all.
I realise that you are doing this for your university exams and not for ACCA, but you should ask your university lecturer about it.Regarding your second question, if there is no other information at all, then the answer is that you would take up the offer. If the bond is trading at $1260 then this is regarded by the market as a fair price, and being able to buy it at $1200 must be worthwhile.
However, I think there is probably more information in the question than you have typed, and this could well affect things.
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