Question 1

Bonner Metals wants to issue new 18-year bonds for some much-needed expansion projects. The company currently has 11 percent bonds on the market that sell for $1,459.51, make semiannual payments, and mature in 18 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. To sell a bond at par, the coupon rate must be set equal to the required return.

Question 2

Bond S is a 4 percent coupon bond. Bond T is a 10 percent coupon bond. Both bonds have 11 years to maturity, make semiannual payments, and have a yield-to-maturity of 7 percent. If interest rates suddenly rise by 2 percent, what will the percentage change in the price of Bond T be?

Accepted Answer

Percentage change in price = ($1,068.92 - $1,227.51)/$1,227.51 = -12.92 percent

Question 3

An investment offers a 10.5 percent total return over the coming year. Sam Bernanke thinks the total real return on this investment will be only 4.5 percent. What does Sam believe the inflation rate will be for the next year?

Accepted Answer

(1 + 0.105) = (1 + 0.045) F1F1F1S1F1F1F10 (1 + h); h = 5.74 percent

Question 4

The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today, you buy a 12 percent annual coupon bond for $1,000. The bond has 13 years to maturity. Two years from now, the yield-to-maturity has declined to 11 percent and you decide to sell. What is your holding period yield?

Accepted Answer

The yield-to-maturity at the time of purchase must be 12 percent, which is the coupon rate, because the bond was purchased at par value.Yield-to-maturity in 2 years = 12 percent - 1 percent = 11 percent This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Question 5

You purchase a bond with an invoice price of $1,460. The bond has a coupon rate of 9.4 percent, and there are 3 months to the next semiannual coupon date. What is the clean price of this bond?

Accepted Answer

Accrued interest = (0.094 F1F1F1S1F1F1F10 $1,000) F1F1F1S1F1F1F10 (3/12) = $23.50Clean price = $1,460 - $23.50 = $1,436.50

Question 6

Technical Sales, Inc. has 6.6 percent coupon bonds on the market with 9 years left to maturity. The bonds make semiannual payments and currently sell for 88.79 percent of par. What is the effective annual yield?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. Effective annual rate = [1 + (0.0840/2)]² - 1 = 8.58 percent

Question 7

You want to have $1.04 million in real dollars in an account when you retire in 46 years. The nominal return on your investment is 8 percent and the inflation rate is 3.5 percent. What is the real amount you must deposit each year to achieve your goal?

Accepted Answer

(1 + 0.08) = (1 + r) F1F1F1S1F1F1F10 (1 + 0.035); r = 4.347826 percent

Question 8

Suppose the following bond quote for the Beta Company appears in the financial page of today's newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2009. What is the yield to maturity on this bond?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Quiz 7: Interest Rates and Bond Valuation