Problems

1) The bonds of the Nordy Company have a coupon interest rate of 9%. The interest on the bonds is paid semiannually, the bonds mature in 8 years, and their par value is $1,000. If the required rate of return, k_d = 8%, what is the value of each bond? What is the value of each bond if the interest is paid annually?

2) You own a bond that pays $100 in interest annually, has a par value of $1000, and matures in 15 years. What is the value of the bond if your required rate of return is 12%? What is the value of the bond if your required rate of return (a) increases to 15% or (b) decreases to 8%? Now, recompute all three answers assuming that the bond matures in 5 years instead of 15 years.

3) Dullco Company bonds are selling in the market for $1,045 (104.50). These bonds will mature in 15 years and pay $70 in interest annually. If the bonds are purchased at the market price, what is the (a) coupon rate, (b) current yield,

(c) approximate yield to maturity and (d) capital gains yield?

4) Apex Company is planning to issue zero coupon bonds that will mature at $1,000 in 20 years. If your required rate of return on these bonds is 9.35%, what are you willing to pay for the bonds? If these bonds are currently selling for $213.50, what is their yield to maturity (YTM)?

Answers

1) $1,058.26; $1,057.47

2) $863.78; (a)$707.63; (b)$1,171.19

$927.90; (a)$832.39; (b)$1,079.85

3) (a)7%; (b)6.70%; (c)6.50%; Exact YTM = 6.5208%;

(d)-0.20%; Exact CGY = -0.1792%

4) $167.35; 8.03%