Exercise Bond and Their Valuation 1.

Sanchez Hydraulics Company has outstanding a 14 percent coupon bond with 3 years to maturity. Interest payments are made semiannually. Assume a face alue of !1"". #1$41%& a. $1% If the mar'et price of the bond is !1"4( what is the yield to maturity) $*% if it were !+,( what would be the yield) $3% if it were !1"") b. $1% If the bond-s yield were 1* percent( what would be its price) $*% if it were 1. percent) $3% if it were 14 percent) c. Instead of a coupon bond( suppose it were zero coupon ( pure discount instrument. If the yield were 14 percent( what would be the mar'et price) $Assume semiannual compounding.% *. Callaghan /otors-s bonds ha e 1" years remaining to maturity. Interest is paid annually( the bonds ha e a !1(""" par alue( and the coupon interest rate is 0 percent. 1he bonds ha e a yield to maturity of + percent. 2hat is the current mar'et price of these bonds) #*$*3"%& 3. 1hatcher Corporation-s bonds will mature in 1" years. 1he bonds ha e a face alue of !1(""" and an 0 percent coupon rate( paid semiannually. 1he price of the bonds is !1(1"". 1he bonds are callable in . years at a call price of !1(".". 2hat is the yield to maturity) 2hat is the yield to call) #*$*3"%& 4. 3ungesser Corporation has issued bonds that ha e a + percent coupon rate( payable semiannually. 1he bonds mature in 0 years( ha e a face alue of !1("""( and a yield to maturity of 0.. percent. 2hat is the price of the bonds) #*$*3"%& .. A bond that matures in 1" years sells for !+0.. 1he bond has a face alue of !1(""" and a , percent annual coupon. #*$*3"%& a. 2hat is the bond-s current yield) b. 2hat is the bond-s yield to maturity $41/%) c. Assume that the yield to maturity remains constant for the ne5t 3 years. 2hat will be the price of the bond 3 year for today) 6. A bond trader purchased each of the following bonds at a yield to maturity of 0 percent. Immediately after she purchased the bonds interest rate fell to , percent. 2hat is the percentage change in the price of each bond after the decline in interest rates) 7ill in the following table8 #*$3"*%& 9rice : 0; 9rice : ,; 9ercentage Change 1"<year( 1"; annual coupon 1"<year zero .<year zero 3"<year zero !1"" perpetuity

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,. An in estor has two bonds in his portfolio. =ach bond matures in 4 year( has a face alue of !1("""( and has a yield to maturity e>ual to +.6 percent. ?ne bond( @ond C( pays an annual coupon of 1" percentA the other bond( @ond B( is a zero coupon bond. #*$3"*%& a. Assume that the yield to maturity of each bond remains at +.6 percent o er the ne5t 4 years( what will be the price of each of the bonds at the following time periods) 7ill in the following table8 t 9rice of @ond C 9rice of @ond C " 1 * 3 4 b. 9lot the time path of the prices for each of the two bonds. 0. 1he 9ennington Corporation issued a new series of bonds on Danuary 1( 1+,+. 1he bonds were sold at par $!1("""%( ha e a 1* percent coupon( and mature in 3" years( on Cecember 31( *""0. Coupon payments are made semiannually $on Dune 3" and Cecember 31%. #*$*++%& a. 2hat was the 41/ of 9ennington-s bonds on Danuary 1( 1+,+) b. 2hat was the price of the bond on Danuary 1( 1+04( . years later( assuming that the le el of interest rate had fallen to 1" percent) c. 7ind the current yield and capital gains yield on the bond on Danuary 1( 1+04( gi en the price as determined in part b. d. ?nly Duly 1( *""*( 9ennington-s bonds sold for !+16.4*. 2hat was the 41/ at that date) e. 3ow( assume that you purchased an outstanding 9ennington bond on /arch 1( *""*( when the going rate of interest was 1... percent. How large a chec' must you ha e written to complete the transaction) +. 1he @ra er company has two bond issues outstanding. @oth bonds pay !1"" annual interest plus !1(""" at maturity. @ond E has a maturity of 1. years and @ond S a maturity of 1 year. #3$333%& a. 2hat will be the alue of each of these bonds when the going rate of interest is $1% . percent( $*% 0 percent( and $3% 1* percent) Assume that there is only one more interest payment to be made on @ond S. b. 2hy does the longer<term $1.<year% bond fluctuate more when interest rates change than the shorter<term bond $1<year%)

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