FINA 300 Ch 7 HW - Ch. 7, Marco Svetina PDF

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Ch. 7, Marco Svetina...

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1. Interpreting Bond Yields

Is the yield to maturity on a bond the same thing as the required return? Is the YTM the same th coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the requ on the same bond is 8 percent. What is the coupon rate on the bond then? the YTM? Yes. Coupon Rate Maturity Market Rate Face value Bond Price YTM

10% 2 8% -1000 $679.01 8%

$100.00 paid annually

2. Interpreging Bond Yields Suppose you buy a 7 percent coupon, 20-year bond today when it's first issued. If interest rates sud 15 percent, what happens to the value of your bond? Why?

The Value of the Bond would decrease because of the inverse relationship between p interest rates. As the interest rate rises, the price of the bond will decrease

3. Valuing Bonds

Even though most corporate bonds in the United States make coupon payments semiannually, bo elsewhere often have annual coupon payments. Suppose a German company issues a bond with a 1000 euros, 23 years to maturity, and a coupon rate of 3.8 percent paid annually. If the yield to ma percent, what is the current price of the bond? Coupon Rate PMT Maturity Face Value YTM Bond Price

3.80% -$38.00 23 -1000 4.70% $875.09

4. Bond Yields A Japanese company has a bond outstanding that sells for 105.43 percent of its 100,000 yen par bond has a coupon rate of 3.4 percent paid annually and matures in 16 years. What is the yield to this bond? Coupon Rate PMT Maturity Face Value Bond Price YTM

3.40% 3400.00 16 100,000 105430.00 2.97%

5. Coupon Rates Gabriele Enterprises has bonds on the market making annual payments, with eight years to matu value of $1000, and a selling for $948. At this price, the bonds yield 5.1 percent. What must the cou on the bonds? Coupon Rate PMT Maturity Face Value Bond Price YTM

1.82% $18.23 8 1000 948 2.55%

6. Bond Prices West Corp. issued 25-year bonds two years ago at a coupon rate of 4.9 percent. The bonds make s payments and have a par valye of $1,000. If the YTM on these bonds is 4.5 percent what is the cu price? Coupon Rate PMT Maturity Face Value YTM Bond Price

4.90% 24.5 50 1000 4.50% $373.46

7. Bond Yields

West Corp. issued 25-year bonds two years ago at a coupon rate of 5.3 percent. The bonds make s

payments. If these bonds currently sell for 105 percent of par value, what is the YTM? Coupon Rate PMT Maturity Face Value Bond Price YTM (semiannual) YTM (annual)

5.30% 26.5 46 1000 -1050 2.47% 4.93%

10. Valuing Bonds

Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.4 percent paid sem and a 13 years to maturity, The yield to maturity of the bond is 4.8 percent. What is the price of Coupon Rate PMT Maturity Face Value YTM (semiannual) Bond Price

4.40% 44 26 2000 2.40% $1,923.29

11. Valuing Bonds Union Local School District has a bond outstanding with a coupon rate of 2.8 percent paid semiann years to maturity. The yield to maturity on this bond is 3.4 , and the bond has a par value of $5,00 the price of the bond? Coupon Rate PMT Maturity Face Value YTM Bond Price

1.40% 70 32 5000 1.70% $4,632.13

12. Calculating Real Rates of Return If Treasury bills are currently paying 4.7 percent and the inflation rate is 2.2 percent, what is the a real rate of interest? The exact real rate? Inflation Rate Nominal Rate

2.20% 4.70%

Real Rate

2.446%

13. Inflation and Nominal Returns Suppose the real rate is 2.1 percent and the inflation rate is 3.4 percent. What rate would you expe a Treasury bill? Inflation Rate Real Rate Nominal Rate

2.10% 3.40% 5.57%

14. Nominal and Real Returns An investment offers a total return of 12.3 percent over the coming year. Janice Yellen thinks the return on this investment will be only 8 percent. What does Janice believe the inflation rate will b next year? Real Rate Nominal Rate Inflation Rate

8% 12.30% 3.98%

15. Nominal versus Real Returns Say you own an asset that had a total return last year of 11.65 percent. If the inflation rate last ye percent, what was your real return? Nominal Rate Inflation Rate Real Rate

11.65% 2.75% 8.66%

16. Using Treasury Quotes

Locate the Treasury issue in Figurer 7.4 maturing in May 2038. What is the coupon rate? What is i What was the precious day's asked price? Assume a par value of $10,000. Coupon Rate Bid Ask Change Asked Yield Bid Price Asked Price

4.50% 128.0625 128.125 0.6875 2.749 1280625 12743.75

20. Interest Rate Risk

Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 1 maturity, make semiannual payments, and have YTM of 6 percent. If interest rates suddenly rise b what is the percentage price change of these bonds? What if rates suddenly fall by 2 percent inst does this problem tell you aboutthe interest rate risk of lower-coupon bonds? Bond J Coupon Rate PMT Maturity Face Value YTM Bond Price

1.50% 15.00 28.00 1000 3% $718.54

If Interest Rate + 2% Bond J Coupon Rate PMT Maturity Face Value YTM Bond Price

1.50% 15.00 28.00 1000 4% $583.42

Change in Bond Price

-18.80%

If Interest Rate - 2% Bond J Coupon Rate PMT Maturity Face Value YTM Bond Price

1.50% 15.00 28.00 1000 2% $893.59

Change in Bond Price

19.59%

Bond K Coupon Rate PMT Maturity Face Value YTM Bond Price

4.50% 45 28 1000 3% $1,281.46

Bond K Coupon Rate 4.50% PMT 45 Maturity 28 Face Value 1000 YTM 4% Bond Price $1,083.32 Change in Bond Price -15.46%

Bond K Coupon Rate 4.50% PMT 45 Maturity 28 Face Value 1000 YTM 2% Bond Price $1,532.03 Change in Bond Price 16.36%

22. Bond Yields

Chamberlain Co. wants to issue new 20-year bonds for some much-needed expansion projects. Th currently has 6 percent coupon bonds on the market that sell for $1083, make semiannual paym

mature in 20 years. What coupon rate should the company set on its new bonds if it wants them to Coupon Rate PMT Maturity Face Value Bond Price YTM

2% 30 20 1000 $1,083 6%

25. Finding the Bond Maturity

Excey Corp. has 8 percent coupon bonds making annual payments with a YTM of 7.2 percent. The c on these bonds is 7.55 percent. How many years do these bonds have left until they matu YTM PMT Face Value Bond Price Maturity

7.20% 80.00 1000.00 1059.60 11.06

29. Zero Coupon Bonds

Suppose your company needs to raise $53 million and you want to issue 20-year bonds for this Assume the required return on your bond issue will be 5.3 percent, and you're evaluating two alternatives: a semiannual coupon bond with a coupon rate of 5.3 percent, and a zero coupon go company's tax rate is 21 percent. Both bonds will have a par value lf $1,000. a. How many of the coupon bonds would you need to issue to raise the $53 million? How many of t b. In 20 years, what will your company's repayment be if you issue the coupon bonds? What if you a.

Bond Price Desired Revenue #Coupon Bonds

$1,000 53000000 $53,000

b.

20 year repayment

54404500

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