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Activity #3

This document contains 5 practice problems related to bond valuation. Problem 1 asks the reader to calculate the coupon rate, current rate, and yield to maturity given bond details. Problem 2 compares two bonds and asks the reader to calculate current yields, yields to maturity, and determine the preferred bond. Problem 3 provides details of a zero-coupon bond and asks the reader to calculate initial price and future values given different interest rates. Problem 4 asks the reader to calculate the equivalent tax-free rate needed for a government bond to match the after-tax return of a corporate bond. Problem 5 asks the reader to determine which of two bonds would show a greater price change given an interest rate increase and then calculate bond prices at the new interest rate.

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Chryshelle Anne Marie Lontok
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517 views2 pages

Activity #3

This document contains 5 practice problems related to bond valuation. Problem 1 asks the reader to calculate the coupon rate, current rate, and yield to maturity given bond details. Problem 2 compares two bonds and asks the reader to calculate current yields, yields to maturity, and determine the preferred bond. Problem 3 provides details of a zero-coupon bond and asks the reader to calculate initial price and future values given different interest rates. Problem 4 asks the reader to calculate the equivalent tax-free rate needed for a government bond to match the after-tax return of a corporate bond. Problem 5 asks the reader to determine which of two bonds would show a greater price change given an interest rate increase and then calculate bond prices at the new interest rate.

Uploaded by

Chryshelle Anne Marie Lontok
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 DOCX, PDF, TXT or read online on Scribd
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FM 415 Activity #3

Name:
Section:

Problem 1
The Violeta Corporation has a bond outstanding with a P90 annual interest payment, a market
price of P820, and a maturity date of five years.
Find (a) the coupon rate, (b) the current rate, and (c) the approximate yield to maturity.

Problem 2
An investor must choose between two bonds:

Bond A pays P80 annual interest and has a market value of P800. It has 10 years
to maturity.

Bond B pays P85 annual interest and has a market value of P900. It has 2 years to
maturity.

A. Compute the current yield on both bonds.


B. Which bond should he select based on your answer to part (a)?
C. A drawback of the current yield is that it does not consider the bond's total life. For
example, the approximate yield to maturity on Bond A is 11.36 percent. What is the
approximate yield to maturity on Bond B?
D. Has your answer changed between parts (b) and (c) of this question in terms of which
bond to select?

Problem 3
A 20-year, P1,000 par value zero-coupon rate bond is to be issued to yield 11
percent.
A. What should be the initial price of the bond? (Take the present value of P1,000 for 20
years at 11 percent, using the Table for the Present Value of an Ordinary Annuity.)
B. If interest rates dropped to 9 percent immediately upon the issue, what would be the
value of the zero-coupon rate bond?
C. If interest rates increased to 13 percent immediately upon the issue, what would be the
value of the zero-coupon rate bond?

Problem 4
Sunita wants to earn the highest possible after-tax return on her savings. She has two options: a
corporate bond and a tax-free government bond. The corporate bond yields 5%, and Sunita is in
the 25% marginal tax bracket. What equivalent tax-free rate would a government bond need to
have to make her indifferent between the corporate bond and the government bond?
Problem 5
Nirmo Power and Light has two P1,000 par value bonds outstanding. Bond X matures in five
years and Bond Y matures in 15 years. Both bonds pay P80 interest annually and currently sell
at their par value. Thus, the current required rate of return is 8 percent.
A. Which bond should show the greater price change in response to an increase in the
required rate of return?
B. What is the intrinsic value of each bond if the required rate of return is 9 percent?
C. Compare the price changes in the two bonds when the required rate of return changes
to 9 percent.

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