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Problem Set # 3 - Bond Valuation and Interest Rates Question # 1

This document contains 8 questions related to bond valuation and interest rates. Question 1 asks for the price of a bond with a 10% coupon rate, 8 year maturity, $1,000 face value and 8.5% yield to maturity. Question 2 asks for the yield to maturity, current yield and capital gains yield of a bond with an 8% coupon rate, 10 year maturity, $1,000 face value and price of $1,100. Question 3 asks for the value of two bonds with different maturities (15 years and 1 year) when the yield to maturity is 8% and 12% and why the longer term bond price fluctuates more. The remaining questions ask about bond prices over time, call and sinking

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siddhant jain
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134 views2 pages

Problem Set # 3 - Bond Valuation and Interest Rates Question # 1

This document contains 8 questions related to bond valuation and interest rates. Question 1 asks for the price of a bond with a 10% coupon rate, 8 year maturity, $1,000 face value and 8.5% yield to maturity. Question 2 asks for the yield to maturity, current yield and capital gains yield of a bond with an 8% coupon rate, 10 year maturity, $1,000 face value and price of $1,100. Question 3 asks for the value of two bonds with different maturities (15 years and 1 year) when the yield to maturity is 8% and 12% and why the longer term bond price fluctuates more. The remaining questions ask about bond prices over time, call and sinking

Uploaded by

siddhant jain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Problem Set # 3 – Bond Valuation and Interest rates

Question # 1
GAMA Corp has issued bonds that have a 10% coupon rate, payable semiannually. The bonds
mature in 8 years, have a face value of $1,000 and a yield to maturity of 8.5% . What is the price
of the bonds?

Question # 2
Renfro Corporation’s bonds will mature in 10 years. The bonds have a face value of $1,000 and
an 8% coupon rate, paid semiannually. The price of the bonds is $1,100. What is the bond’s yield
to maturity, current yield and capital gains yield?

Question # 3
The FAMA Company has two bond issues outstanding. Both bonds pay $100 annual interest
plus $1000 face value at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity
of 1-year. 
What will be the value of each of these bonds when the going rate of interest (yield to maturity)
is: 
A) 8%
B) 12%
Why does the longer-term (15-year) bond fluctuate more when interest rates change than does
the shorter-term bond (1-year)?

Question # 4

Suppose Dillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 face
value, a 10% coupon rate, and semiannual interest payments.

a) Two years after the bonds were issued, the going rate of interest on bonds such as these
fell to 6%. At what price would the bonds sell?
b) Suppose that 2-years after the issue date (as in part a) interest rates fell to 6%. Suppose
further that the interest rate remained at 6% for the next 8 years. What would happen to
the price of the bonds over time? Explain

Question # 5
What are call provisions and sinking fund provisions? Do these provisions make bonds more
or less risky?
Question # 6
Which of the following statements is CORRECT?
  a. If a coupon bond is selling at par, its current yield equals its yield to maturity.
  b. If a coupon bond is selling at a discount, its price will continue to decline until it
reaches its par value at maturity.
  c. If interest rates increase, the price of a 10-year coupon bond will decline by a greater
percentage than the price of a 10-year zero coupon bond.
  d. If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a
premium.
  e. If a coupon bond is selling at a premium, its current yield equals its yield to maturity.

Question # 7
A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following
statements is CORRECT?
  a. If the yield to maturity remains constant, the bond's price one year from now will be
higher than its current price.
  b. The bond is selling below its par value.
  c. The bond is selling at a discount.
  d. If the yield to maturity remains constant, the bond's price one year from now will be
lower than its current price.
  e. The bond's current yield is greater than 9%.

Question # 8
Which of the following bonds has the greatest price risk?
  a. A 10-year $100 annuity.
  b. A 10-year, $1,000 face value, zero coupon bond.
  c. A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
  d. All 10-year bonds have the same price risk since they have the same maturity.
  e. A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

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