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Time Value of Money

This document contains 8 practice problems related to bond valuation: 1. A bond with a YTM of 7.6%, price of $1,175, and semiannual payments maturing in 13.5 years. The question asks for the coupon rate. 2. A German bond with an 8.4% annual coupon, €1,000 par value, YTM of 7.6%, and maturity of 15 years. The question asks for the current price. 3. A Japanese bond selling at 87% of par, with a 5.4% annual coupon and maturity of 21 years. The question asks for the YTM.

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Alelie dela Cruz
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114 views1 page

Time Value of Money

This document contains 8 practice problems related to bond valuation: 1. A bond with a YTM of 7.6%, price of $1,175, and semiannual payments maturing in 13.5 years. The question asks for the coupon rate. 2. A German bond with an 8.4% annual coupon, €1,000 par value, YTM of 7.6%, and maturity of 15 years. The question asks for the current price. 3. A Japanese bond selling at 87% of par, with a 5.4% annual coupon and maturity of 21 years. The question asks for the YTM.

Uploaded by

Alelie dela Cruz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ASSIGNMENT – FM2

1. Rhiannon Corporation has bonds on the market with 13.5 years to maturity, a YTM of 7.6 percent, and a current price of $1,175. The bonds make
semiannual payments. What must the coupon rate be on these bonds?

2. Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon
payments. Suppose a German company issues a bond with a par value of €1,000, 15 years to maturity, and a coupon rate of 8.4 percent paid
annually. If the yield to maturity is 7.6 percent, what is the current price of the bond?

3. A Japanese company has a bond outstanding that sells for 87 percent of its ¥100,000 par value. The bond has a coupon rate of 5.4 percent paid
annually and matures in 21 years. What is the yield to maturity of this bond?

4. Miller Corporation has a premium bond making semiannual payments. The bond pays a 9 percent coupon, has a YTM of 7 percent, and has 13
years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond pays a 7 percent coupon, has a YTM of 9
percent, and also has 13 years to maturity. If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now?
In 3 years? In 8 years? In 12 years? In 13 years? What’s going on here? Illustrate your answers by graphing bond prices versus time to maturity.

5. Laurel, Inc., and Hardy Corp. both have 8 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par
value. The Laurel, Inc., bond has 2 years to maturity, whereas the Hardy Corp. bond has 15 years to maturity. If interest rates suddenly rise by 2
percent, what is the percentage change in the price of these bonds? If interest rates were to suddenly fall by 2 percent instead, what would the
percentage change in the price of these bonds be then? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell
you about the interest rate risk of longer-term bonds?

6. The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a 14 percent bond outstanding. Both bonds have 8 years to
maturity, make semiannual payments, and have a YTM of 10 percent. If interest rates suddenly rise by 2 percent, what is the percentage change in
the price of these bonds? What if interest rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of
lower coupon bonds?

7. Hacker Software has 7.4 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell
for 96 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?

8. Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 10 percent coupon
bonds on the market that sell for $1,063, make semiannual payments, and mature in 20 years. What coupon rate should the company set on its new
bonds if it wants them to sell at par?

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