Financial Question
cial solution
Golden Apples
Professor Jerry Langham
MBA 554: 262
27 January 2009
Chapter 5: Problems 1, 2, 3, 4, 7, 12, & 25
1. Bond Yields. A 30-year Treasury bond is issued with face value of $1,000, paying interest of $60 per year. If market yields increase shortly after the T-bond is issued, what happens to the bond’s a. coupon rate? The fixed rate is 6% and will not change the $60 per year. b. price? Price is dependent upon the market interest rate. If the market interest rate goes up, the bond price goes down; if the interest rate goes down, the price of the bond must increase. c. yield to maturity? If the market yield increases, the yield to maturity will increase, and vice versa. d. current yield? Current rate = coupon rate ÷ bond price. As the bond price changes the current yield will as well. If the bond price is lower, the current yield will be higher and vice versa.
2. Bond Yields. If a bond with face value of $1,000 and a coupon rate of 8 percent is selling at a price of $970, is the bond’s yield to maturity more or less than 8 percent? What about the current yield? Because the bond is discounted, the yield to maturity must be more than 8%, so the yield to maturity is greater than the coupon rate. Current yield = coupon payment ÷ bond price Coupon payment = $1000 * .08 = $80 CY = 80÷ 970 = 8.247 which is greater than 8%.
3. Bond Yields. A bond with face value $1,000 has a current yield of 7 percent and a coupon rate of 8 percent. What is the bond’s price? If x = the bond price .07 = 80/x x= 80/.07 = $1,142.86
4. Bond Pricing. A 6-year Circular File bond pays interest of $80 annually and sells for $950. What are its coupon rate, current yield, and yield to maturity? Coupon rate = 80/1000 = 8% Current yield = 80 ÷ 950 = 8.42% Yield to maturity = 950 = 80 * ((1/r)- (1/(r*(1+r)^6)))+ (1000/(1+r)^6) In calc…N = 6, PV = -950, PMT = 80, FV = 1000 = 9.119%
7.Coupon Rate. General Matter’s outstanding bond issue has a
Golden Apples
Professor Jerry Langham
MBA 554: 262
27 January 2009
Chapter 5: Problems 1, 2, 3, 4, 7, 12, & 25
1. Bond Yields. A 30-year Treasury bond is issued with face value of $1,000, paying interest of $60 per year. If market yields increase shortly after the T-bond is issued, what happens to the bond’s a. coupon rate? The fixed rate is 6% and will not change the $60 per year. b. price? Price is dependent upon the market interest rate. If the market interest rate goes up, the bond price goes down; if the interest rate goes down, the price of the bond must increase. c. yield to maturity? If the market yield increases, the yield to maturity will increase, and vice versa. d. current yield? Current rate = coupon rate ÷ bond price. As the bond price changes the current yield will as well. If the bond price is lower, the current yield will be higher and vice versa.
2. Bond Yields. If a bond with face value of $1,000 and a coupon rate of 8 percent is selling at a price of $970, is the bond’s yield to maturity more or less than 8 percent? What about the current yield? Because the bond is discounted, the yield to maturity must be more than 8%, so the yield to maturity is greater than the coupon rate. Current yield = coupon payment ÷ bond price Coupon payment = $1000 * .08 = $80 CY = 80÷ 970 = 8.247 which is greater than 8%.
3. Bond Yields. A bond with face value $1,000 has a current yield of 7 percent and a coupon rate of 8 percent. What is the bond’s price? If x = the bond price .07 = 80/x x= 80/.07 = $1,142.86
4. Bond Pricing. A 6-year Circular File bond pays interest of $80 annually and sells for $950. What are its coupon rate, current yield, and yield to maturity? Coupon rate = 80/1000 = 8% Current yield = 80 ÷ 950 = 8.42% Yield to maturity = 950 = 80 * ((1/r)- (1/(r*(1+r)^6)))+ (1000/(1+r)^6) In calc…N = 6, PV = -950, PMT = 80, FV = 1000 = 9.119%
7.Coupon Rate. General Matter’s outstanding bond issue has a