Bonds and Their Valuation

You are considering a 10-year, 51,000 par value bond. Its coupon rate is 9%, and interest is paid semiannually. If you require an “effective” annual interest rate (not a nominal rate) of 8.16%, how much should you be willing to pay for the bond? 7-17 BOND RETURNS fast year Joan purchased a $1,000 face value corporate bond with an 11% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.79%. If Joan sold the bond today for $1,060.49, what rate of return would she have earned for the past year? 7-18 YIELD TO MATURITY AND VIEW TO CALL Kaufman Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,175. The bonds may be called in 5 years at 109% of face value (Call price = $1,090). a. What is the yield to maturity? b. What is the yield to call if they are called in 5 years? c Which yield might investors expect to earn on these bonds? Why? d. The bond’s indenture indicates that the call provision gives the firm the right to call the bonds at the and of each year beginning in Year 5. In Year 5, the bonds may be called at 109% of face value; but in each of the next 4 years, the call percentage will decline by 1% Thus, in Year 6,

Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have ken most likely? 7-13 PRICE AND YIELD An 8% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 8.21%. What are the bond’s price and YTN’ (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) 7-14 EXPECTED INTEREST RATE Lloyd Corporation’s 14% coupon rate, semiannual payment, SUCCO par value bonds, which mature in 30 years, are callable 5 years from today at $1,050. They sell at a price of 51,353.54, and the yield curve is flat. Assume that interest rates are expected to remain at their current level. a. What is the best estimate of these bonds’ remaining life? b. If Lloyd plans to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par? 7-15 BOND VALUATION Bond X is noncallable and has 20 years to maturity, a 9% annum coupon, and a $1,000 par value. Your required return on Bond Xis 10%; if you buy it. %, . plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the to maturity on a 15-year bond with similar risk will be 8.5%. How much should yol willing to pay for Bond X today? (Hint: You will need to know how much the bond to worth at the end of 5 years.)

Six years ago the Singleton Company rued 20.year bonds with a 14% annual coupon rate at their $LOW par value. The bonds had a 9% call premium, with 5 years of call protection. Today Singleton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were calk d. Explain why the investor should or should not be happy that Singleton called them.
7-9 YIELD TO MATURITY I Lehmann Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%. a. What is the yield to maturity at a current market price of (1) $829 and (2) $1,104? b. Would you pay $829 for each bond if you thought that a “fair” market interest rate for such bonds was 12%—that is, if r, — 12%? Explain your answer. 7-10 CURRENT YIELD, CAPITAL GAINS YIELD, AND YIELD TO MATURITY I looper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in was -9.86%. interest rates, the bond’s market price has fallen to $901.40. The capital gains yield last year a. What is the yield to maturity? b. For the coming year, what are the expected current and capital gains yields? (I lint: Refer to footnote 7 for the definition of the current yield and to Taw- , I ‘ C. Will the actual realized vieldx ha —–‘

7-1 BOND VALUATION Callaghan Motors’s bonds have 10 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 8%; and the yield to maturity is 9%. What is the bond’s current market price? 7-2 YIELD TO MATURITY AND FUTURE PRICE A bond has a $1,000 par value, 10 years to maturity, and a Pk annual coupon and sells for $985. a. What is its yield to maturity (YTM)? b. Assume that the yield to maturity remains constant for the next three years. What will the price be 3 years from today? 7-3 BOND VALUATION Nungesser Corporation’s outstanding bonds have a $1,000 par value, a 9% semiannual coupon, 8 years to maturity, and an 8.5% YTM. What is the bond’s price? 7-4 YIELD TO MATURITY A face’s bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,050, and currently sell at a price of $1,100. What are their nominal yield to maturity and their nominal yield to call? What return should investors expect to earn on these bonds? 7-5 BOND VALUATION An investor has two bonds in his portfolio that have a face value of 51,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.

What will the value of each bond be if the going interest rate is 5%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 15 more payments are to be made on Bond L. Why does the longer-term bond’s price vary more than the price of the shorter-term centre when interest rates change?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sample Solution

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