Bond Practice Questions

Bond Practice Questions
1. On January 1, 2002, Zheng Corporation will issue new bonds to finance its expansion plans. In its efforts to price
the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an
8 percent coupon rate that is due January 1, 2017. This firm's bonds currently are selling for $1,091.96. If
interest is paid semiannually for both bonds, what must the coupon rate of the new bonds be in order for the
issue to sell at par?
2. Marigold Merchants has an outstanding issue of $1,000 par value bonds with an 8% coupon interest rate. The
issue pays interest annually and has 15 years remaining to its maturity date. Bonds of similar risk are currently
yielding a 10% rate of return. What is the value of these Marigold Merchants bonds? Is the bond selling at a
discount or premium, and why?
(b) Marigold Merchants also has an outstanding issue of $1,000 par value bonds with a 12% interest rate.
The issue pays interest semiannually and has 10 years remaining to maturity. Bonds of similar risk are currently
selling to yield a 10% rate of return. What is the value of these Marigold Merchants bonds? Is the bond selling at
a discount or premium, and why?
3. ABC Co. has 9 percent coupon bonds outstanding (coupon is paid annually) that have fourteen years to maturity.
These bonds are currently trading at $978 per bond. What is ABC’s annual cost of debt?
4. A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What is the change in
the price of this bond if the market yield rises to 6% from the current yield of 4.5%, stated in as a percentage?
5. STU Co. has 8 percent bonds outstanding (coupon paid quarterly) that have seventeen years to maturity. These
bonds are trading at $1020 per bond. What is STU’s annual cost of debt?
6. Bounty Inc. has outstanding a fixed coupon, $1,000 par value bond with 15 years remaining until maturity. The
bond makes semi-annual coupon payments and the coupon rate is 7 percent. If the bond currently sells at a
price of $825 per bond, what is the annual yield to maturity of the bond?
7. On September 5, 2009 the Hewlett Packard Corporation (HP) had an issue of bonds outstanding that had 5 years
remaining to maturity on which it paid semi-annual interest payments of $32.50. The bonds were selling for
$1,063.33. What is the yield to maturity on this bond issue?
8. Zeta Corporation has issued a $1,000 face value zero-coupon bond. What is the correct price for the bond if
the appropriate discount rate is 7% compounded annually and the bond matures in 5 years? Is the bond selling
at a discount or premium, and why?
9. Value the following bonds assuming a discount rate of 9 percent:
(i) a 5 percent coupon bond that pays coupon semi-annually and has thirty five years to maturity,
(ii) a 12 percent coupon bond that pays coupon quarterly and has fifteen years to maturity
10. A General Co. bond has an 8% coupon 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?
11. The semiannual, ten-year bonds of Adep, Inc, are selling at par and have an effective annual yield of 4.295%.
What is the amount of each interest payment on a $1,000 Adep bond?
12. A $1,000 par value, fixed coupon bond has 17 years remaining until maturity. The bond has a coupon rate of 8
percent and it pays semi-annual coupon payments. If the market rate for this bond is 7.25 percent, what is the
price of the bond?
13. The MerryWeather Firm wants to raise $10 million to expand their business. To accomplish this, the company
plans to sell 30-year, $1,000 face value zero-coupon bonds. The bonds will be priced to yield 5.5%. What is the
minimum number of bonds the company must sell to raise the $10 million they need?
14. AAA Corporation recently issued 20-year bonds with a $1,000 face value. These bonds pay $60 in coupon
payment every six months. The bonds currently sell for $1,000. Due to additional financing needs, the firm has
decided to issue new bonds that will have a maturity of 10 years, a par value of $1,000, and pay $40 in coupon
payments every six months. If both bonds have the same yield, how many new bonds must AAA issue to raise
$3,000,000 cash?
15. A coupon bond that pays coupons semi-annually has a yield to maturity of 9 percent per year. The bond has a
par value of $1,000 and is selling for $1,088.33. The bond has 18 years left to maturity. Determine the annual
coupon rate.
16. Calculate the value of a $5,000 par-value bond paying quarterly interest at an annual coupon interest rate of
10% and having 10 years until maturity if the required return on similar-risk bonds is currently a 12% annual rate
paid quarterly.
17. Jackson Central has a 6-year, 8% annual coupon bond with a $1,000 par value. Earls Enterprises has a 12-year,
8% annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 6%, Which
bond will decrease in value with the market yield increases to 7% and by what percentage?

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Bond Practice Questions

9. Value the following bonds assuming a discount rate of 9 percent:

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