3. Using the regular Treasury note of Problem 2: a. What is its price if investorsâ€™ required...

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3. Using the regular Treasury note of Problem2:
a. What is its price if investorsâ€™ required rate ofreturn is 6.0 percent on similar bonds? Treasury notes pay interestsemiannually.
b. Erron Corporation wants to issue five-year notes butinvestors require a credit risk spread of 3 percentage points. Whatis the anticipated coupon rate on the Erron notes?
the treasuring note of problem 2
2. Judy Johnson is choosing between investing in twoTreasury securities that mature in five years and have par valuesof $1,000. One is a Treasury note paying an annual coupon of 5.06percent. The other is a TIPS that pays 3 percent interestannually.
a. If inflation remains constant at 2 percent annuallyover the next five years, what will be Judyâ€™s annual interestincome from the TIPS bond? From the Treasury note?
b. How much interest will Judy receive over the fiveyears from the Treasury note? From the TIPS?
c. When each bond matures, what par value will Judyreceive from the Treasury note? From the TIPS?
d. After five years, what is Judyâ€™s total income(interest + par) from each bond? Should she use this total as a wayof deciding which bond to purchase?

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4.1 Ratings (809 Votes)

Face value	$1,000
Coupon	5.06% semiannually
Period	Interest Semiannually($)	PV factor@ 3% semi annually	Present Value in $
1	25.3	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.9709	Â Â Â Â Â Â Â Â Â Â Â 24.56
2	25.3	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.9426	Â Â Â Â Â Â Â Â Â Â Â 23.85
3	25.3	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.9151	Â Â Â Â Â Â Â Â Â Â Â 23.15
4	25.3	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.8885	Â Â Â Â Â Â Â Â Â Â Â 22.48
5	25.3	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.8626	Â Â Â Â Â Â Â Â Â Â Â 21.82
6	25.3	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.8375	Â Â Â Â Â Â Â Â Â Â Â 21.19
7	25.3	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.8131	Â Â Â Â Â Â Â Â Â Â Â 20.57
8	25.3	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.7894	Â Â Â Â Â Â Â Â Â Â Â 19.97
9	25.3	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.7664	Â Â Â Â Â Â Â Â Â Â Â 19.39
10	25.3	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.7441	Â Â Â Â Â Â Â Â Â Â Â 18.83
10	1000	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.7441	Â Â Â Â Â Â Â Â Â 744.09
price of similar bonds	Â Â Â Â Â Â Â Â Â 959.91

b. Since the investors expected credit risk is 3%, coupon rate should be 3% in excess of actual coupon rate = 8.06%.(5.06+3)

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