1. Bell Corp. issues a bond with the following features:
| Principal |
$1,000 |
| Coupon |
0% |
| Maturity |
5 years |
The current interest rate on comparable debt is 7 percent, so the bond initially sells for $713. What is the accrued interest on the bond for each of the next five years?
2. A $1,000 bond has a coupon rate of 8 percent and matures after ten years.
a) What is the cut rent price of the bond if the comparable rate of interest is 8 percent?
b) What is the current price of the bond if the comparable rate of interest is 10 percent?
c) What arc the current yields given the prices determined in parts (al and (b)?
d) Why are the prices in (al and (b) and the current yields in (c) different?
3. A company has two bonds outstanding. The first matures after five years and has a coupon rate of 8.25 percent. The second matures after ten years and has a coupon rate of 8.25 percent. Interest rates are currently I 0 percent. What is the present price of each $1,000 bond? Why are these prices different?
4. An Investor is in the 28 percent income tax bracket and can earn 3.3 percent on a nontaxable bond. What is the comparable yield on a taxable bond? If this same investor can earn 5.9 percent on a taxable bond, what must be the yield on a nontaxable bond so that the after-tax yields are equal?
5. You are in the 28 percent federal income tax bracket. A corporate bond offers you 6.8 percent while a tax-exempt bond with the same credit rating and term to maturity offers 4.1 percent. On the basis of taxation, which bond should be preferred? Explain.