Problem Set # 3 - Bond Valuation and Interest rates

Question # 1

GAMA Corp has issued bonds that have a10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of$1,000 and a yield to maturity of8.5%. What is the price of the bonds?

Question # 2

Renfro Corporation's bonds will mature in10 years. The bonds have a face value of$1,000and an8% coupon rate, paid semiannually. The price of the bonds is$1,100. What is the bond's yield to maturity, current yield and capital gains yield?

Question # 3

The FAMA Company has two bond issues outstanding. Both bonds pay$100annual interest plus$1000 face value at maturity. Bond L has a maturity of15 years, and Bond S has a maturity of1-year.

What will be the value of each of these bonds when the going rate of interest (yield to maturity) is:

1. 8%
2. 12%

Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1-year)?

Question # 4

Suppose Dillard Manufacturing sold an issue of bonds with a10-year maturity, a$1,000 face value, a10% coupon rate, and semiannual interest payments.

1. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to6%. At what price would the bonds sell?
2. Suppose that2-years after the issue date (as in part a) interest rates fell to6%. Suppose further that the interest rate remained at6%for the next8 years. What would happen to the price of the bonds over time? Explain

Question # 5

What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky?

Question # 6

Which of the following statements is CORRECT?

	a.	If a coupon bond is selling at par, its current yield equals its yield to maturity.
	b.	If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
	c.	If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.
	d.	If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
	e.	If a coupon bond is selling at a premium, its current yield equals its yield to maturity.

Question # 7

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

	a.	If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.
	b.	The bond is selling below its par value.
	c.	The bond is selling at a discount.
	d.	If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
	e.	The bond's current yield is greater than 9%.

Question # 8

Which of the following bonds has the greatest price risk?

	a.	A 10-year $100 annuity.
	b.	A 10-year, $1,000 face value, zero coupon bond.
	c.	A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
	d.	All 10-year bonds have the same price risk since they have the same maturity.
	e.	A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.