| 1. A General Power bond with a face value of $1,000 carries a coupon rate of 9.9%, has 9 years until maturity, and sells at a yield to maturity of 8.9%. (Assume annual interest payments.) |
| a. | What interest payments do bondholders receive each year? |
| Interest payments | $ |
| b. | At what price does the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Price | $ |
| c. | What will happen to the bond price if the yield to maturity falls to 7.9%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Price will |
| by | $ |
| 2. One bond has a coupon rate of 5.0%, another a coupon rate of 8.0%. Both bonds pay interest annually, have 7-year maturities, and sell at a yield to maturity of 6.0%. |
| a. | If their yields to maturity next year are still 6.0%, what is the rate of return on each bond? (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) |
| Rate of return | |
| Bond 1 | % |
| Bond 2 | % |
| b. | Does the higher-coupon bond give a higher rate of return? | ||||
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| 3. General Matter’s outstanding bond issue has a coupon rate of 8.2%, and it sells at a yield to maturity of 7.25%. The firm wishes to issue additional bonds to the public at face value. What coupon rate must the new bonds offer in order to sell at face value? (Round your answer to 2 decimal places.) | |||||
| Coupon rate | % |
| 4. Consider three bonds with 6.7% coupon rates, all making annual coupon payments and all selling at a face value of $1,000. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has maturity 30 years. |
| a. | What will be the price of each bond if their yields increase to 7.7%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
| 4 Years | 8 Years | 30 Years | |
| Bond price | $ | $ | $ |
| b. | What will be the price of each bond if their yields decrease to 5.7%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
| 4 Years | 8 Years | 30 Years | |
| Bond price | $ | $ | $ |
| c. | Are long-term bonds more or less affected than short-term bonds by a rise in interest rates? | ||||
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| d. | Would you expect long-term bonds to be more or less affected by a fall in interest rates? | |||||||||||||||||||||||||||||||||||||||||||||||||
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6.
| a. | Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000 at a yield to maturity of 6.6%. Now, with 6 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 13%. What is the price of the bond now? (Assume semiannual coupon payments.) (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Bond price | $ |
| b. | Suppose that investors believe that Castles can make good on the promised coupon payments but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 86% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) |
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