8. What do you note about the sum of the present value of these yeariy incomes? On June 20, 2013, Koala, Inc. issued a 10 yeac bond (with a typical $1000 face value) that had an annual coupon value of $55. #1. Nominal yield Current yield- #2. Nominal yield #3- YTM in 2013 #4. RP in 2013 #5. Describe in 2-3 sentences.] .Initially, the bond was sold for the premium price of $1,025, On June 20, 2018, this bond was selling for only $9s5. . The market rate of interest for a riskless corporate bond, of this maturity, was 4.5% on Current yield June 20, 2013, which reflects market expectations about future rates of infi ation. YTM in 2018 . The market rate of interest for a riskless corporate bond, of this maturity, was 4.0% on June 20, 2018, which refiects market expectations about future rates of inf ation. RP in 2018 1. What was the nominal and current yield on this bond on June 20, 2013? 2. What was the nominal and current yield on this bond on June 20, 2018? 3. What was the yield to maturity for this bond on June 20, 2013? On June 20, 2018? 4. What happened to the risk premium for this bond from June 20, 2013 to June 20, 2018? #6. Selling price- #7 2019 2020 2021 2022 2023 Income: PV: S. Briefly, explain why this change may have occurred. There are a millon and one possibilities here, so just be speculative, but reasonable.) #8 [What do you note ] S. Suppose that the market becomes even more certain that future rates of inflation will fall, and the market rate of interest for a riskless corporate bond, of this maturity, falls from 4.0% to 2.5% (i.e., today in 2018). If there is no further change in the risk premium expected for this Koala, Inc. bond, what will its selling price be? 7. What will be the discounted present value of the income stream of this bond? 2019 2020 2021 2022 2023 Income: PV:
For the particular example, it is given that the Coupon Value (CV) = $55, which is paid one a year
Face Value (FV) = $1000 and time of maturity (n) = 10 years.
Formula for Nominal Yield = CV/FV------1
Formula for Current Yield = CV/MV-------2
Therefore,
2. Market Value (MV) in 2018 = $955
Therefore,
3. Formula for Yield to Maturity (YTM) is:
YTM = {CV + (FV-MV)/n}/(FV+MV)/2}
In 2013, the year to maturity (n) = 10 years
Therefore YTM in 2013 = {55+ (1000-1025)/10}/(1000+1025)/2
Or YTM in 2013 = 5.185%
In 2013, the year to maturity (n) = 5 years
Therefore YTM in 2013 = {55+ (1000-955)/5}/(1000+955)/2
Or YTM in 2013 = 6.547%
4. Risk premium is the difference between the expected rate of return and the risk free rate of return in that particular year.
In 2013, it is given that the risk free rate of return = 4.5%
Therefore risk premium in 2013 = 5.185%-4.5% = 0.685%
In 2018 it is given that the risk free rate of return = 4.0%
Therefore risk premium in 2013 = 6.547%-4.0% = 2.574%
Thus, the risk premium rises from 2013 to 2018.
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