PQ BOND Valuation - managerial finance PDF

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Practice Questions: Bond Valuation 1.

Define the following terms commonly used in bond valuation: (a) par value, (b) maturity date, (c) coupon, (d) coupon rate, (e) yield to maturity (YTM)

2.

Suppose that Naza Motors Corporation issued a bond with 10 years until maturity, a face value of RM1,000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%.

3.

a)

What was the price of this bond when it was issued?

b)

Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?

c)

Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?

Consider the following bonds:

a) What is the percentage change in the price of each bond if its yield to maturity falls from 6% to 5%? b) Which of the bonds A–D is most sensitive to a

1% drop in interest rates from 6% to 5% and why? Which bond is least sensitive? Provide an intuitive explanation for your answer. 4.

Bumi Armada has an issue of RM1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Bumi Armada bonds?

5.

a)

What is the relationship between the price of a bond and its YTM? 1

6.

b)

Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value?

c)

What is the relationship between the current yield and YTM for premium bonds? For discount bonds? For bonds selling at par value?

Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of RM1,000 and the current date is 15 April 2011. What is the yield to maturity of the bond? What is the current yield? Compan y (Ticker)

Coupon

Maturity

Last Price

Last Yield

EST Vol (000s)

IOU

5.7

19 Apr 2028

108.96

??

1,827

7.

A bond that matures in 2 years makes semi-annual interest payments. Its par value is RM1,000, its coupon rate equals 4%, and the bond’s market price is RM1,019.27. What is the bond’s yield to maturity?

8.

The SILK Highway has a bond outstanding with a face value of RM1,000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. (Use financial calculator) a) b) c)

9.

How much will each semiannual coupon payment be? Assuming the appropriate YTM on the SILK Highway bond is 7.5%, and then what is the price that this bond trades for? Assuming the appropriate YTM on the SILK Highway bond is 9.0%, and then what is the price that this bond trades for?

Two bonds offer a 5% coupon rate , paid annually, and sell at par (RM1,000). One bond matures in two years and the other matures in ten years. a) b) c)

What are the YTMs on each bond? If the YTM changes to 4%, what happens to the price of each bond? What happens if the YTM changes to 6%? 2

10. Suci Food Berhad has issued a bond with par value of RM1,000, a coupon rate of 9 percent that is paid semi-annually, and that matures in 10 years. What is the value of the bond if the required rate of return is 12 percent?

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