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# Bonds

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1. Valuing Bonds
What is the price of a 10-year, zero coupon bond paying \$1,000 at maturity if the YTM is:
a) 5 percent?
b) 10 percent?
c. 15 percent?

2. Interest Rate Risk
The Faulk Corp has a 6 percent coupon bond outstanding. The Gonas Company has a 14 percent bond oustanding. Both bonds have 8 years to maturity, make semiannual payments, and have a YTM of 10 percent. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? What if interest rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower coupon bonds?

3. Bond Yields
Hacker Software had 7.4 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 96 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?

#### Solution Preview

Use the following formula in Excel to get to the answer. You can also use a financial calculator to solve:

=PV(Rate,Periods, Payment, Future Value)

(a)
=PV(5%,10,0,1000)
=\$613.91

(b)
=PV(10%,10,0,1000)
=385.54

(c)
=PV(15%,10,0,1000)
=\$247.18