Problems 1
A $1,000 bond has a coupon of 6 percent and matures after 10 years.
a. What would be the bond’s price if comparable debt yields 8 percent?
Price = $1,000 x 0.4632 + $1,000 x 6% x 6.7101
Price = $463.20 + $402.61
Price = $865.81
b. What would be the price if comparable debt yields 8 percent and the bond matures after five years?
Price = $1,000 x 0.6806 + $1,000 x 6% x 3.9927
Price = $680.60 + $239.56
Price = $920.16
c. Why are the prices different in a and b?
The prices are different in a and b because the value of a has longer period.
d. What are the current yields and the yields to maturity in a and b?
Current Yield:
a. $60 / $865.81 = 6.93%
b. $60 / $920.16 = 6.52%
Yield to Maturity (using Financial Calculator)
a. 8%
b. 8%
Problem 2
A $1,000 bond has a 7.5 percent coupon and matures after 10 years. If current interest rates are 10 percent, what should be the price of the bond?
Delegate your assignment to our experts and they will do the rest.
Price = $1,000 x 0.3855 + $1,000 x 7.5% x 6.1446
Price = $385.50 + $460.85
Price = $846.35
b. If after six years the interest rates are still 10 percent, what should be the price of the bond?
Price = $1,000 x 0.6830 + $1,000 x 7.5% x 3.1699
Price = $683 + $237.74
Price = $920.74
c. Even though interest rates did not change in a and b, why did the price of the bond change?
The price of the bond changes with time.
d. Change the interest rate in a and b to 6 percent and rework your answers. Even though the interest rate is 6 percent in both calculations, why are the bond prices different?
= 1000*.558+1000*.075*7.360
= 558+552
= 1110
= 1000*.792+1000*.075*3.465
= 792+259.875
= 1051.87
Problem 4
Carrie’s Clothes, Inc. has a five-year bond outstanding that pays $60 annually. The face value of each bond is $1,000, and the bond sells for $890.
a. What is the bond’s coupon rate?
60/1000=6%
b. What is the current yield?
60/890=6.74%
c. What is the yield to maturity?
8.81% Using online calculator
Problem 9
A bond has the following features:
• Coupon rate of interest: 5 percent
• Principal: $1,000
• Term to maturity: 10 years
a. What will the holder receive when the bond matures?
The principal $1,000
b. If the current rate of interest on comparable debt is 8 percent, what should be the price of this bond? Would you expect the firm to call this bond? Why?
= 1000*.463+1000*.05*6.710
= 463+335.50
= 798.50
The price is lower than the par value, I would not expect them to call this bond.
c. If the bond has a sinking fund that requires the firm to set aside annually with a trustee sufficient funds to retire the entire issue at maturity, how much must the firm remit each year for ten years if the funds earn 8 percent annually and there is$100 million outstanding?
FV = Annual Payments x FV of Annuity Factor 8% for 10 years
$10,000,000 = Annual Payment x 14.487
Annual Payment = $10,000,000 / 14.487
Annual Payment = $690,274.04
