Problem 1: What is the value of a 10-year, $1,000 par value bond with a 10% annual coupon if its required return is 10%?
Problem 2:
(1) What is the value of a 13% coupon coupon bond that is otherwise identical to the bond described in Part above? Would you now have a discount or a premium bond?
(2) What is the value of a 7% coupon bond with these characteristics? Would we now have a discount or premium bond?
(3) What would happen to the value of the 7%, 10% and 13% coupon bonds over time if the required return remained at 10%? Hint: With a financial calculator, enter PMT, I/YR, FV, and N; then change (override) N to see what happens to the PV as it approaches maturity.
Problem 3:
(1) What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887.00? that sells for $1,134.20? What does the fact that it sells at at discount or at a premium tell you about the relationship between Rd and the coupon rate?
(2) What are the total return, the current yield, and the capital gains yield for the discount bond? Assume that it is held to maturity and the company does not default on it.
Problem 4: What is interest rate (or price) risk? Which has more interest rate risk, an annual payment 1-year bond or a 10-year bond? Why?
Problem 5: What is reinvestment rate risk? Which has more reinvestment rate risk, a 1-year bond or a 10-year bond?
Problem 6: How does the equation for valuing a bond change if semiannual payments are made? Find the value of a 10-year, semiannual payment, 10% coupon bond if nominal Rd = 13%
Problem 7: Suppose for $1,000 you could buy a 10%, 10-year, annual payment bond or a 10%, 10-year, semiannual payment bond. They are equally risky. Which would you prefer? If $1,000 is the proper price for the semiannual bond, what is the equilibrium price for the annual payment bond?
Problem 8: Suppose a 10-year, 10% semiannual coupon bond with a par value of $1,000 is currently selling for $1,135.90 producing a nominal yield to maturity of 8%. However, it can be called after 4 years for $1,050.
(1) What is the bond's nominal yield to call (YTC)?
(2) If you bought this bond, would you be more likely to earn the YTM or the YTC? Why?