Finance Exercises 6.1 Yield Curves and 6.2. Bond Valuation

  

Exercise 6.1. Yield CurvesThe following yield data on three U.S. Treasury securities, each having a differentmaturity, are measured at three points in time.Yield %Time to Maturity 5 Years Ago 2 Years Ago Today6 months 10.00 9.5 15.21 year 10.75 9.6 15.05 years 11.50 9.7 13.010 years 12.00 9.8 12.520 years 13.50 9.9 11.0a. On the same set of axes, draw the yield curve at each of the points in time given.b. Describe each curve in part a as to its general shape (downward sloping, flat, upwardsloping), and discuss the general interest rate expectations existing at each point in time.Exercise 6.2. Bond Valuationa. Marigold Merchants has an outstanding issue of $1,000 par value bonds with an 8%coupon interest rate. The issue pays interest annually and has 15 years remaining to itsmaturity date. Bonds of similar risk are currently yielding a 10% rate of return. What isthe value of these Marigold Merchants bonds?Is the bond selling at a discount or premium, and why?b. Marigold Merchants also has an outstanding issue of $1,000 par value bonds with a12% interest rate. The issue pays interest semiannually and has 10 years remaining tomaturity. Bonds of similar risk are currently selling to yield a 10% rate of return. What isthe value of these Marigold Merchants bonds?Is the bond selling at a discount or premium, and why?