Three years ago, you purchased an year bond issued by Thrumbauer Inc. for At that time the bond had a BBB credit rating. Year Expected Payments to Bond Owner The yield on an 8 year Treasury note at that time was (1) What interest rate (%/year) did this bond yield when you purchased it? $2,335.00 $2,335.00 $2,335.00 2.65% (1) What is the risk premium on the 8 year Thrumbauer bonds? $43,255 $2,335.00 Year Expected Payments to Bond Owner $2,335.00 $2,335.00 43,255 $2,335.00 8 $2,335.00 $47,750.00 4 $2,335.00 $2,335.00 $2,335.00 $2,335.00 $2,335.00 $2,335.00 $47,750.00
Three years ago, you purchased an year bond issued by Thrumbauer Inc. for At that time the bond had a BBB credit rating. Year Expected Payments to Bond Owner The yield on an 8 year Treasury note at that time was (1) What interest rate (%/year) did this bond yield when you purchased it? $2,335.00 $2,335.00 $2,335.00 2.65% (1) What is the risk premium on the 8 year Thrumbauer bonds? $43,255 $2,335.00 Year Expected Payments to Bond Owner $2,335.00 $2,335.00 43,255 $2,335.00 8 $2,335.00 $47,750.00 4 $2,335.00 $2,335.00 $2,335.00 $2,335.00 $2,335.00 $2,335.00 $47,750.00
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 26P
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Transcribed Image Text:Question 1
Parts A, B and C
Part A
Three years ago, you purchased an year bond issued by Thrumbauer Inc. for
At that time the bond had a BBB credit rating.
Year
1
$2,335.00
Expected Payments to Bond Owner
The yield on an 8 year Treasury note at that time was
(i) What interest rate (%/year) did this bond yield when you purchased it?
2
$2,335.00
2.65%
(ii) What is the risk premium on the 8 year Thrumbauer bonds?
3
$2,335.00
$43,255
4
$2,335.00
Year
Expected Payments to Bond Owner
5
6
$2,335.00 $2,335.00
43,255
$2,335.00
7
8
$2,335.00 $47,750.00
2
3
4
5
6
7
8
$2,335.00 $2,335.00 $2,335.00 $2,335.00 $2,335.00 $2,335.00 $47,750.00
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Transcribed Image Text:Part B
Today, three years later, yields on US Treasuries are as shown below.
Treasury Yield (%/year)
And Thrumbauer's improved financial performance has resulted in its credit rating improving to A.
(i) Should its risk premium today be:
Choose one and expalin your answer.
(ii) Using the risk premium selected above, what would be the interest (yield) on Thrombauer's bond today?
(iii) What would be the price of the bond today?
(iv) What would be your return (%/year) if you sold the bond at this price?
1
4.10%
2.85%
Years to Maturity
2
4.30%
3.25%
3
4.39%
3.65%
5
4.50%
8
4.65%
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