Download Supplemental Instruction Finance 301: Porter 1o/22/08 A bond that

Supplemental Instruction
Finance 301: Porter
1o/22/08
1. A bond that matures in 8 years has a par value of $1000, an annual coupon payment of
$70 and a market interest rate of 9%. What is its price? Is this a premium bond or a
discount bond?
N= 8 I/Y= 9 FV=1000 PMT=70 CPT PV=889.30
Discount because it sells below par value.
2. A bond that matures in 12 years and has a par value of $1000, and annual coupon of
10%, and a market interest rate of 8%. What is its price? Is this a premium bond or a
discount bond?
N=12
I/Y=8
FV=1000
PMT=0.10*1000= 100
Premium because it sells above its par value.
CPT PV=$1150.72
3. What is yield to maturity?
a. The rate of return earned on a bond if it is held to maturity.
4. A bond has a $1000 par, sells for $887, has a 9% annual coupon, what is the yield to
maturity on the bond?
N=10
PV=-887
PMT= 0.09*1000= 90
FV=1000
CPT I/Y=10.91%
5. What is yield to call?
a. The rate of return earned on a bond if it is called before its maturity date.
6. Six years ago a company issued 20 year bonds with a 14% annual coupon rate at their
$1000 par value. The bonds had a 9% call premium, with 5 years of call protection.
Today, they called the bonds. Compute the realized rate of return for an investor who
purchased the bonds when they were issued and held them until they were called.
N=6 (because the bonds were only actually 6 year bonds b/c they were called after 6 years)
PMT= 140
PV=-1000
FV= 1090 (what it is worth with the 9% call premium)
CPT I/Y= 15.03%
7. What is current yield?
a. The annual interest payment on a bond divided by the bonds current price.
b. Annual interest/PRICE
8. A bond has a par value of $1000, 10 years to maturity, a 7% coupon and it sells for $985.
What is its current yield? What is its yield to maturity?
Current yield= annual interest pmt/price
=(0.70 * 1000)/price= 70/985 = 7.11%
Yield to maturity=
N= 10
PV= -985
PMT=70
FV=1000
CPT I/Y=7.22%
9. What is the value of a 12 year, 10%, semiannual coupon bond if rd= 15%?
N= 12*2= 24
I/Y= 15/2= 7.5
PMT=100/2= 50
FV= 1000
CPT PV=725.43
*note rd=the bonds market rate of interest. This is the discount rate used to calculate the
present value of the bond’s cash flows, which is also its price.
10. Define the following: interest rate risk, reinvestment rate risk..
Interest rate risk- the risk of a decline in a bond’s price due to an increase in interest rates.
Reinvestment rate risk- the risk that a decline in interest rates will lead to a decline in
income from a bond portfolio.