Question 1

A Treasury bond matures in 17 years,pays interest semiannually,and carries a coupon rate of 3.5 percent.How much are you willing to pay for a $1,000 face value bond if you desire a rate of return of 4.25 percent?

Accepted Answer

Bond value = [(.035 × $1,000)/2] × ({1 - 1/[1 + (.0425/2)]^{17 × 2}}/(.0425/2))+ {$1,000/[1 + (.0425/2)]^{17 × 2}} = $909.86

Question 2

River Tours has 7.5 percent coupon bonds that pay interest semiannually.The face value of each bond is $1,000 and the current market price is $1,012.20.If the yield to maturity is 7.6 percent,how many years is it until these bonds mature?

Accepted Answer

Number of years = 17.59/2 = 8.80 years

Question 3

Webster's has a 12-year bond issue outstanding that pays a coupon rate of 6.5 percent.The bond is currently priced at $938.76 and has a par value of $1,000.Interest is paid semiannually.What is the yield to maturity?

Accepted Answer

The answer of Webster's has a 12-year bond issue outstanding...

Question 4

Antonio's offers a 10-year bond that has a coupon rate of 5 percent and semiannual payments.The face value is $1,000 and the yield to maturity is 12.6 percent.What is the current value of this bond?

Accepted Answer

Bond value = [(.05 × $1,000)/2] × ({1 - 1/[1 + (.126/2)]^{10 × 2}}/(.126/2))+ {$1,000/[1 + (.126/2)]^{10 × 2}} = $574.56

Question 5

A zero coupon bond has a yield to maturity of 7.48 percent,semiannual compounding,a $1,000 face value,and a market price of $386.48.How many years is it until this bond matures?

Accepted Answer

$1,000 = $386.48 [1 + (.0748/2)^T]T = 25.89 semiannual periods Number of years = 25.89/2 = 12.95 years

Question 6

A General Co.bond has a coupon rate of 7 percent and pays interest annually.The face value is $1,000 and the current market price is $1,020.50.The bond matures in 20 years.What is the yield to maturity?

Accepted Answer

To calculate yield to maturity, we need to use the following formula: 
YTM = (C + ((FV - PV) / n)) / ((FV + PV) / 2)
Where 
C = annual coupon payment
FV = face value
PV = current market price
n = number of years until maturity
Using the values provided in the question, we get: 
YTM = (70 + ((1000 - 1020.50) / 20)) / ((1000 + 1020.50) / 2)
YTM = 6.81%
Therefore, the best choice is B.

Question 7

A 20-year zero coupon bond has a $1,000 face value,a required rate of return of 5 percent,and semiannually compounding.What is this bond worth today?

Accepted Answer

$1,000/[1 + (.05/2)]^{20 × 2} = $372.43

Question 8

Gugenheim offers a 15-year coupon bond with semiannual payments.The yield to maturity is 5.85 percent and the bonds sell at 94 percent of par.What is the coupon rate?

Accepted Answer

.94 × $1,000 = C × ({1 - 1/[1 + (.0585/2)]^{15 × 2}}/(.0585/2))+ {$1,000/[1 + (.0585/2)]^{15 × 2}}C = $26.22 Coupon rate = ($26.22 × 2)/$1,000 = .0524,or 5.24%

Question 9

Autos and More offers a zero coupon bond with a yield to maturity of 11.3 percent.The bond matures in 15 years and has a face value of $1,000.What is this bond worth today? (Assume semiannual compounding. )

Accepted Answer

Zero coupon bonds generally use semiannual compounding to be consistent with coupon bonds.Bond value = $1,000/[1 + (.113/2)]^{15 × 2} = $192.27

Question 10

The bonds offered by Leo's Pumps are callable in 4 years at a quoted price of 102.What is the amount of the call premium on a $1,000 par value bond?

Accepted Answer

Call premium = (102% × $1,000)- $1,000 = $1,020 - 1,000 = $20

Question 11

A 15-year,4 percent coupon bond with a face value of $1,000 pays interest semiannually.Assume the bond currently sells at par.What will the percentage change in the price of this bond be if market rates increase by 10 percent?

Accepted Answer

Since the bond is selling at par:Current market rate = Coupon rate = 4%New interest rate = 1.1 × 4% = 4.4%Bond value = [(.04 × $1,000)/2] × ({1 - 1/[1 + (.044/2)]^{15 × 2}}/(.044/2))+ {$1,000/[1 + (.044/2)]^{15 × 2}} = $956.41 Percentage change in price = ($956.41 - $1,000)/$1,000 = -1.96%

Question 12

The bonds issued by North & South bear a coupon rate of 7.5 percent,payable semiannually.The bonds mature in 6.5 years,sell at par,and have a $1,000 face value.What is the yield to maturity?

Accepted Answer

No math is required;since the bonds sell at par,the yield to maturity will equal the coupon rate.

Question 13

Your firm offers a 20-year,semiannual coupon bond with a yield to maturity of 8.35 percent,a face value of $1,000,and a market price of $1,054.What is the coupon rate?

Accepted Answer

$1,054 = C × ({1 - 1/[1 + (.0835/2)]^{20 × 2}}/(.0835/2))+ {$1,000/[1 + (.0835/2)]^{20 × 2}}C = $44.55 Coupon rate = ($44.55 × 2)/$1,000 = .0891,or 8.91%

Question 14

A 12-year,5 percent coupon bond with a face value of $1,000 pays interest semiannually.What is the percentage change in the price of this bond if the market yield rises to 6 percent from its current level of 4.5 percent?

Accepted Answer

Bond value = [(.05 × $1,000)/2] × ({1 - 1/[1 + (.045/2)]^{12 × 2}}/(.045/2))+ {$1,000/[1 + (.045/2)]^{12 × 2}} = $1,045.97 Bond value = [(.05 × $1,000)/2] × ({1 - 1/[1 + (.06/2)]^{12 × 2}}/(.06/2))+ {$1,000/[1 + (.06/2)]^{12 × 2}} = $915.32 Percentage change in price = ($915.32 - $1,045.97)/$1,045.97 = -.1249,or -12.49%

Question 15

The Rose Shoppe offers 10-year,8 percent coupon bonds with semiannual payments and a yield to maturity of 8.24 percent.What is the market price of a $1,000 face value bond?

Accepted Answer

Bond value = [(.08 × $1,000)/2] × ({1 - 1/[1 + (.0824/2)]^{10 × 2}}/(.0824/2))+ {$1,000/[1 + (.0824/2)]^{10 × 2}} = $983.86

Question 16

Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to:

Accepted Answer

The answer of Two of the primary differences between a...

Question 17

Delray bonds offer a coupon rate of 5 percent and currently sell at 96.5 percent of face value.What is the current yield on these bonds?

Accepted Answer

Assuming a $1,000 face value: (.05 × $1,000)/(.965 × $1,000)= .0518,or 5.18%You can also compute this as: 5%/96.5% = .0518,or 5.18%

Question 18

A corporate bond is quoted at a current price of 101.352.What is the market price of a bond with a $1,000 face value?

Accepted Answer

Market price = 101.352% × $1,000 = $1,013.52

Question 19

The Doolittle bonds have a face value of $1,000,a current market price of $1,048.50,a coupon rate of 4.6 percent,compounded semiannually.What is the current yield on these bonds?

Accepted Answer

Current yield = (.046 × $1,000)/$1,048.50 = .0439,or 4.39%

Question 20

A $1,000 face value bond has a current market price of $867.32,a coupon rate of 6 percent,a yield to maturity of 7.34 percent,and semiannual interest payments.How many years is it until this bond matures?

Accepted Answer

Number of years = 36/2 = 18 years

Quiz 5: Interest Rates and Bond Valuation