Handout for Assignment 7.1: Bond Valuation

Use the following data to answer the assignment questions. Assume you are evaluating whether to purchase the following $1,000 face value bonds:

Co. X bond with a 6% coupon rate that matures in 9 years.

Co. Y bond with an 11% coupon rate that matures in 7 years.

Answer the following questions: Use a spreadsheet file to calculate and report the following information:

• Value these bonds assuming a market rate on similar risk bonds is 7% and interest is paid annually.
• Value these bonds assuming a market rate on similar risk bonds is 7% and interest is paid semi-annually.
• Value these bonds assuming a market rate on similar risk bonds is 12% and interest is paid annually.
• Assuming both bonds were issued at the same time, why would the Co. Y bond pay a higher coupon rate?