Principles of Corporate Finance

Eleventh Edition

Chapter 3
Question 3

In February 2012 Treasury 61/4s of 2030 offered a semiannually compounded yield of

2.70%. Recognizing that coupons are paid semiannually, calculate the bond’s price.

Enter the values in blue colored cells

Chapter 3
Question 3

Student Name: SOLUTION

Course Name:
Student ID:
Course Number:

Use Excel's PRICE function to find the value of the bond under the following assumptions:

Settlement Date 2/15/2009

Maturity Date 2/15/2026
Coupon Rate 0.06
YTM 0.035965
Price 130.37 For help with Excel's PRICE function

Copyright © 2011 McGraw-Hill/Irwin

Copyright © 2011 McGraw-Hill/Irwin
 Principles of Corporate Finance
Eleventh Edition

Chapter 3
Question 4

Here are the prices of three bonds with 10-year maturities:

Bond Coupon (%) Price (%)

2 81.62
4 98.39
8 133.42

If coupons are paid annually, which bond offered the highest yield to maturity?
Which had the lowest? Which bonds had the longest and shortest durations?

Enter the values in blue colored cells

Chapter 3
Question 4

Student Name: SOLUTION

Course Name:
Student ID:
Course Number:

Use Excel's YIELD function to find the YTM of the bond under each of the above assumptions:

Coupon Rate 2% 4% 8%
Price (%) 81.62 98.39 133.42
Settlement Date 8/15/2006 8/15/2006 8/15/2006
Maturity Date 8/15/2016 8/15/2016 8/15/2016

YTM 4.3% 4.2% 3.9%

For help with Excel's YIELD function

Copyright © 2011 McGraw-Hill/Irwin

Copyright © 2011 McGraw-Hill/Irwin
 Principles of Corporate Finance
Eleventh Edition

Chapter 3
Question 16

A 10-year U.S. Treasury bond with a face value of $10,000 pays a coupon of
5.5% (2.75% of face value every six months). The semiannually compounded interest rate is
5.2% (a six-month discount rate of 5.2/2 = 2.6%).
a. What is the present value of the bond?
b. Generate a graph or table showing how the bond’s present value changes for semiannually
compounded interest rates between 1% and 15%.

Face Value= $10,000.00

Coupon= 5.50%
Compounded Interest. 2.60%
Present Value= $10,231.64

Copyright © 2011 McGraw-Hill/Irwin

Copyright © 2011 McGraw-Hill/Irwin
 Principles of Corporate Finance
Eleventh Edition

Chapter 3
Question 18

A 6% six-year bond yields 12% and a 10% six-year bond yields 8%. Calculate the six year
spot rate. Assume annual coupon payments. (Hint: What would be your cash
flows if you bought 1.2 10% bonds?)

Enter the values in blue colored cells

Chapter 3
Question 18

Student Name: SOLUTION

Course Name:
Student ID:
Course Number:

Use Excel's PRICE function to calculate the value of each bond. For help with the PRICE function
Assume today's settlement date and a maturity date six years hence.

Bond YTM Current Price Settlement Date Maturity Date

6 % Coupon 12% 75.33155605887 8/1/2009 8/1/2015
10 % Coupon 8% 109.2457593279 8/1/2009 8/1/2015

Copyright © 2011 McGraw-Hill/Irwin

Copyright © 2011 McGraw-Hill/Irwin
 Principles of Corporate Finance
Eleventh Edition

Chapter 3
Question 24

Look up prices of 10 U.S. Treasury bonds with different coupons and different maturities.
Calculate how their prices would change if their yields to maturity increased by 1
percentage point. Are long- or short-term bonds most affected by the change in yields?
Are high- or low-coupon bonds most affected?

Enter the values in blue colored cells

Chapter 3
Question 24

Student Name: SOLUTION

Course Name:
Student ID:
Course Number:

Use Excel's PRICE function to calculate the new value for each of the ten bonds you select.

Price with 1% > Change in

Bond Coupon Rate Maturity (Years) Current Price YTM Price
1 FUNCTION FORMULA
2
3
4
5
6
7
8
9
10

For help with the PRICE function

Explain your answer

In general, yield changes have the greatest impact on long-maturity, low-coupon bonds.

Copyright © 2011 McGraw-Hill/Irwin

Copyright © 2011 McGraw-Hill/Irwin
 Principles of Corporate Finance
Eleventh Edition

Chapter 3
Question 25

Look again at Table 3.5 . Suppose the spot interest rates change
to the following downward-sloping term structure: r1 = 4.6%, r2 = 4.4%, r3 = 4.2%, and
r4 = 4.0%. Recalculate discount factors, bond prices, and yields to maturity for each of the
bonds listed in the table.

TABLE 3.5 The law of one price applied to government bonds

Year
1 2 3 4 Bond price (PV)
Spot rates, % 4.6000 4.4000 4.2000 4.0000
Discount factors 0.9560 0.9175 0.8839 0.8548

Bond A (8% coupon):

Payment (Ct) 80 1,080
PV(Ct) 76.48 990.88 1,067.37

Bond B (8% coupon):

Payment (Ct) 80 80 1,080
PV(Ct) 76.48 73.40 954.60 1,104.48

Bond C (8% coupon):

Payment (Ct) 80 80 80 1,080
PV(Ct) 76.48 73.40 70.71 923.19 1,143.78

Note of cash flows: Year

0 1 2 3 4
Bond A -1,067.37 80 1,080 0 0
Bond B -1,104.48 80 80 1,080 0
Bond C -1,143.78 80 80 80 1,080

Copyright © 2011 McGraw-Hill/Irwin

e

Yield to maturity (y,%)

4.407%

4.219%

4.036%

Copyright © 2011 McGraw-Hill/Irwin