Bonds & Financial Market Questions 1-8 & 12

QUANTITATIVE PROBLEMS I. A bond makes an annual $80 interest payment (8% coupon). The bond has five years before it matures, at which time it will pay $1,000. Assuming a discount rate of 10%, what should be the price of the bond? (Review Chapters 3 and 12) a. If both bonds had a required return of 8%, what would the bonds' prices be? b. Describe what it means if a bond sells at a dis- count, at a premium, and at its face amount (par value). Are these two bonds selling at a discount, 2. Calculate the price of a bond that matures in 8 years, premium, or par? has a face value of $5,000, and has a coupon rate of 2% (paid semiannually) if the market interest rate is 1%. What is the price of the bond if the market inter- est rate drops to 0.5%? e. If the required return on the two bonds rose to 10%, what would the bonds' prices be? 4. A two-year S I : r er-nup m rently priced at $819.00. A two-year $1,000 annuity is currently priced at $1,712.52. If you want to invest $50,000 in one of the two securities, which is a bet- ter buy? (Hint: Compute the yield of each security) 5. Consider the following cash flows. All market interest 3. Consider the two bonds described below: Bond ABond B 15 10 20 Maturity (years) Coupon rate (%) rates are 12%. Year (paid semiannually) Par value 1,000 $1,000 Cash Flow 160 170 180 230