Assignment on Bonds
HOMEWORK ASSIGNMENT
1. Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 8%, and the yield to maturity is 9%. What is the bond’s current market price?
PV factor of sum = (1+i)^-n
= (1+9%)^-10
=1.09^-10
= 0.4224
PV factor of annuity = 1 - (1+i)^-n / i
= 1 - (1+9%)^-10 / 9%
= 1 - 0.4224 / 9%
= 0.5775 / 9%
= 6.417
= PV factor of Sum * Par Value + PV factor of annuity * coupon payment
= 0.4224 * 1,000 + 6.417 * 80
= 422.4 + 513.3
= 935.76
2. An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.
a. What will the value of each bond be if the going interest rate is 5%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 15 more payments are to be made on Bond L.
b. Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?
3. Heymann Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.
a. What is the yield to maturity at a current market price of (1) $829 and (2) $1,104?
b. Would you pay $829 for each bond if you thought that a “fair” market interest rate for such bonds was 12%—that is, if rd ¼ 12%? Explain your answer.
VB =
M = $1,000. PMT = 0.09($1,000) = $90.
1. VB = $829: Input N = 4, PV = -829, PMT = 90, FV = 1000, YTM = I/YR = ? I/YR = 14.99%.
2. VB = $1,104: Change PV = -1104, YTM = I/YR = ? I/YR = 6.00%.
b. Yes. At a price of $829, the yield to maturity, 15%, is greater than your required rate of return of 12%. If your required rate of return were 12%, you should be willing to buy the bond at any price below $908.88.
4. Robert Black and Carol Alvarez are vice presidents of Western Money Management and codirectors of the company’s pension fund
1. Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 8%, and the yield to maturity is 9%. What is the bond’s current market price?
PV factor of sum = (1+i)^-n
= (1+9%)^-10
=1.09^-10
= 0.4224
PV factor of annuity = 1 - (1+i)^-n / i
= 1 - (1+9%)^-10 / 9%
= 1 - 0.4224 / 9%
= 0.5775 / 9%
= 6.417
= PV factor of Sum * Par Value + PV factor of annuity * coupon payment
= 0.4224 * 1,000 + 6.417 * 80
= 422.4 + 513.3
= 935.76
2. An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.
a. What will the value of each bond be if the going interest rate is 5%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 15 more payments are to be made on Bond L.
b. Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?
3. Heymann Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.
a. What is the yield to maturity at a current market price of (1) $829 and (2) $1,104?
b. Would you pay $829 for each bond if you thought that a “fair” market interest rate for such bonds was 12%—that is, if rd ¼ 12%? Explain your answer.
VB =
M = $1,000. PMT = 0.09($1,000) = $90.
1. VB = $829: Input N = 4, PV = -829, PMT = 90, FV = 1000, YTM = I/YR = ? I/YR = 14.99%.
2. VB = $1,104: Change PV = -1104, YTM = I/YR = ? I/YR = 6.00%.
b. Yes. At a price of $829, the yield to maturity, 15%, is greater than your required rate of return of 12%. If your required rate of return were 12%, you should be willing to buy the bond at any price below $908.88.
4. Robert Black and Carol Alvarez are vice presidents of Western Money Management and codirectors of the company’s pension fund