1.

Valuing Bonds What is the price of a 20-year, zero coupon bond paying $1,000 at maturity,
assuming semiannual compounding, if the YTM is:
a. 6 percent? b. 8 percent? c. 10 percent?

2. Valuing Bonds
Microhard has issued a bond with the following characteristics: Par: $1,000, Time to maturity: 15 years, Coupon rate: 7 percent,
Semiannual payments Calculate the price of this bond if the YTM is:
a. 7 percent b. 9 percent c. 5 percent

3. Bond Yields Watters Umbrella Corp. issued 15-year bonds two years ago at a coupon rate of 6.2
percent. The bonds make semiannual payments. If these bonds currently sell for 98 percent of par
value, what is the YTM?

4. Coupon Rates Rhiannon Corporation has bonds on the market with 11.5 years to maturity, a
YTM of 6.8 percent, a par value of $1,000, and a current price of $1,055. The bonds make
semiannual payments. What must the coupon rate be on these bonds?
5. Valuing Bonds Even though most corporate bonds in the United States make coupon payments
semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German
company issues a bond with a par value of €1,000, 15 years to maturity, and a coupon rate of 5.1
percent paid annually. If the yield to maturity is 4.3 percent, what is the current price of the bond?
6. Bond Yields A Japanese company has a bond outstanding that sells for 106 percent of its
¥100,000 par value. The bond has a coupon rate of 2.8 percent paid annually and matures in 17
years. What is the yield to maturity of this bond?
7. Zero Coupon Bonds You find a zero coupon bond with a par value of $10,000 and 13 years to
maturity. If the yield to maturity on this bond is 4.5 percent, what is the dollar price of the bond?
Assume semiannual compounding periods.

8. Valuing Bonds Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of
4.9 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 5.4
percent. What is the dollar price of the bond?
9. Valuing Bonds Union Local School District has bonds outstanding with a coupon rate of 2.9
percent paid semiannually and 12 years to maturity. The yield to maturity on these bonds is 3.4
percent and the bonds have a par value of $5,000. What is the dollar price of each bond?
10. Calculating Real Rates of Return If Treasury bills are currently paying 4.15 percent and the
inflation rate is 2.7 percent, what is the approximate real rate of interest? The exact real rate?
11. Inflation and Nominal Returns Suppose the real rate is 2.25 percent and the inflation rate is 3.2
percent. What rate would you expect to see on a Treasury bill?
12. Nominal and Real Returns An investment offers a total return of 12 percent over the coming
year. Jerome Dowell thinks the total real return on this investment will be only 7 percent. What
does Jerome believe the inflation rate will be over the next year?
13. Nominal versus Real Returns Say you own an asset that had a total return last year of 12.08
percent. If the inflation rate last year was 4.6 percent, what was your real return?
14. Using Treasury Quotes Locate the Treasury bond in Figure 8.4 maturing in November 2028.
What is its coupon rate? What is its bid price? What was the previous day’s asked price? Assume
a par value of $10,000.
15. Using Treasury Quotes Locate the Treasury bond in Figure 8.4 maturing in November 2039. Is
this a premium or a discount bond? What is its current yield? What is its yield to maturity? What
is the bid-ask spread in dollars? Assume a par value of $10,000.
16. Zero Coupon Bonds You buy a zero coupon bond at the beginning of the year that has a face
value of $1,000, a YTM of 5.7 percent, and 20 years to maturity. If you hold the
bond for the entire year, how much in interest income will you have to declare on your tax return?
Assume semiannual compounding.
INTERMEDIATE
(Questions 17–28)

17. Bond Price Movements Miller Corporation has a premium bond making semiannual payments.
The bond pays a coupon of 6.5 percent, has a YTM of 5.3 percent, and has 13 years to maturity.
The Modigliani Company has a discount bond making semiannual payments. This bond pays a
coupon of 5.3 percent, has a YTM of 6.5 percent, and also has 13 years to maturity. Both bonds
have a par value of $1,000. If interest rates remain unchanged, what do you expect the price of
these bonds to be 1 year from now? In 3 years? In 8 years? In 12 years? In 13 years? What’s going
on here? Illustrate your answers by graphing bond prices versus time to maturity.

18. Interest Rate Risk Laurel, Inc., and Hardy Corp. both have 5.8 percent coupon bonds
outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc.,
bond has 3 years to maturity, whereas the Hardy Corp. bond has 20 years to maturity. If interest
rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? If
interest rates were to suddenly fall by 2 percent instead, what would the percentage change in the
price of these bonds be then? Illustrate your answers by graphing bond prices versus YTM. What
does this problem tell you about the interest rate risk of longer-term bonds?
19. Interest Rate Risk The Faulk Corp. has a 7 percent coupon bond outstanding. The Yoo
Company has an 11 percent bond outstanding. Both bonds have 12 years to maturity, make
semiannual payments, and have a YTM of 9 percent. If interest rates suddenly rise by 2 percent,
what is the percentage change in the price of these bonds? What if interest rates suddenly fall by 2
percent instead? What does this problem tell you about the interest rate risk of lower coupon
bonds?
20. Bond Yields Hacker Software has 5.9 percent coupon bonds on the market with 13 years to
maturity. The bonds make semiannual payments and currently sell for 104 percent of par. What is
the current yield on the bonds? The YTM? The effective annual yield?
21. Bond Yields RAK Co. wants to issue new 20-year bonds for some much-needed expansion
projects. The company currently has 5.7 percent coupon bonds on the market that sell for $1,048,
have a par value of $1,000, make semiannual payments, and mature in 20 years. What coupon rate
should the company set on its new bonds if it wants them to sell at par?

22. Accrued Interest You purchase a bond with a par value of $1,000 and an invoice price of $943.
The bond has a coupon rate of 6.4 percent and there are two months to the next semiannual
coupon date. What is the clean price of the bond?
23. Accrued Interest You purchase a bond with a par value of $1,000, a coupon rate of 7.1 percent,
and a clean price of $992. If the next semiannual coupon payment is due in four months, what is
the invoice price?
24. Finding the Bond Maturity Paul’s Dogs Corp. has 9 percent coupon bonds making annual
payments with a YTM of 7.81 percent. The current yield on these bonds is 8.42 percent. How
many years do these bonds have left until they mature?
25. Using Bond Quotes Suppose the following bond quote for IOU Corporation appears in the
financial page of today’s newspaper. Assume the bond has a face value of $1,000, it makes
semiannual coupon payments, and the current date is April 15, 2019. What is the yield to maturity
of the bond? What is the current yield?

26. Finding the Maturity You found a 10 percent coupon bond on the market that sells for par
value. What is the maturity on this bond?

27. Interest on Zeroes Edison Corporation needs to raise funds to finance a plant expansion and has
decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds
will be 5.9 percent and the par value will be $1,000.
a. What will these bonds sell for at issuance?
b. Using the IRS amortization rule, what interest deduction can the company take on these
bonds in the first year? In the last year?
c. Repeat part (b) using the straight-line method for the interest deduction.
d. Based on your answers in (b) and (c), which interest deduction method would the company
prefer? Why?

28. Zero Coupon Bonds Suppose your company needs to raise $50 million and you want to issue
30-year bonds for this purpose. Assume the required return on your bond issue will be 7 percent
and you’re evaluating two issue alternatives: a semiannual coupon bond with a 7 percent coupon
rate and a zero coupon bond. Your company’s tax rate is 21 percent. Both bonds would have a par
value of $1,000.
a. How many of the coupon bonds would you need to issue to raise the $50 million? How many
of the zeroes would you need to issue?
b. In 30 years, what will your company’s repayment be if you issue the coupon bonds? What if
you issue the zeroes?
c. Based on your answers in (a) and (b), why would you ever want to issue the zeroes? To
answer, calculate the firm’s aftertax cash outflows for the first year under the two different
scenarios. Assume the IRS amortization rules apply for the zero coupon bonds.