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Date Posted: 13:40:26 11/07/00 Tue
Author: Charles Hodges
Subject: Re: textbook website online quiz-ch 8
In reply to: Nancy 's message, "textbook website online quiz-ch 8" on 21:56:38 11/04/00 Sat

> Explanation for prob.#7 says current U.S govt. bond
> rate is 7.88%. How did they get that?

The quiz solution at the textbook website is incorrect. I have posted their solution below. The BBB bond yield is 6.32% as given in the solution. We then substract 1.36% from 6.32 to get a government yield of 4.96. The actual percentange change, either 3.04% or 38% ((4.96-8.0)/8.0), is not one of the suggested answers.


Financial calculator solution:
Calculate the YTM on the BBB bonds when they were issued:
Inputs: N = 20; PV = -990.10; PMT = 50; FV = 1,000.
Output: I = 5.08 semiannual; annual rate = 2(5.08%) = 10.16%.

Calculate the rate on U.S. government bonds:
U.S. government bond rate = Rossman?s BBB bonds - RPBBB
= 10.16% - 2.16% = 8.0%.

Calculate the YTM today on the BBB bonds:
Inputs: N = 16; PV = -1228.32; PMT = 50; FV = 1,000.
Output: I = 3.16 semiannual; annual rate = 2(3.16%) = 6.32%.

Calculate the current U.S. government bond rate and the change from two years ago:
Current U.S. government bond rate = 7.88% - 1.36% = 6.52%.
Change in U.S. government bond rate = 8.0% - 6.52%
= -1.46 percentage points.


7. Changes in risk premiums
Two years ago, Rossman Corporation issued BBB-rated bonds and the risk premium was 2.16
percentage points as marked up on long-term U.S. government bonds. The firm's bonds had a
10-year maturity, were semiannual payment 10 percent coupon bonds with a $1,000 par value,
and were priced at $990.10. Currently, Rossman?s BBB-rated bonds have 8 years to maturity
and are priced at $1,228.32. Th

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