Transcribed Image Text
As of March 23, 2017, the yield to maturity on one year U.S.Treasury Bills is just 0.96%. You mention to your broker yourfrustration at only earning such a low interest rate. The brokerresponds by informing you that he can get you into bonds issued byShadyVentures Inc. that promise much better returns. In particular,the ShadyVenture Bonds pay 6.5% annual coupon interest (on asemi-annual basis, as is typical) on face value of $1000 each, arescheduled to mature on March 23, 2037, and are rated B by bothMoodys and S&P. He can get you into these bonds for a price of$920 per bond. (a) What is the yield-to-maturity on theShadyVenture Bonds? (b) Unless your computations are far off base,you should verify that ShadyVenture bonds have a higher yield tomaturity than U.S. Treasury Bills. Identify two reasons or risksthat the ShadyVenture bonds might not be the better investmentdespite their higher yield.