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?
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)
Use the following formula in Excel to get to the answer. You can also use a financial calculator ...
The solution does a great job of answering the question. The solution is brief and concise and very easy to follow along. All the steps are clearly shown and Excel formulas are provided so that the student can answer similar questions in the future. It can be easily understood by anyone with a basic understanding of the topic. Overall, an excellent solution.
Explain the difference between calling a bond and bond refunding.
Identify the three most important determinants of the price of a bond. Describe the effect of each.
Given a change in the level of interest rates, discuss how two major factors will influence the relative change in price for individual bonds.
Briefly describe two indenture provisions that can affect the maturity of a bond.
Explain the differences in taxation of income from municipal bonds, from U.S. Treasury bonds, and from corporate bonds.
For several institutional participants in the bond market, explain what type of bond each is likely to purchase and why.
Why should investors be aware of the trading volume for bonds in their portfolio?
What is the purpose of bond ratings?
Based on the data in Exhibit 17.2 discuss the makeup of the Japanese bond market and how and why it differs from the U.S. market.
2010 ( e )
Total Value Percent of Total
A. U.S. Dollars
Sovereign 5,309,688 34.5
Quasi & Foreign Govt. 1,939,190 12.6
Securitized/Collateralized 4,247,750 27.6
Corporate 2,801,053 18.2
High-Yield/Emerging Mkt. 1,108,109 7.1
Total 15,405,790 100.0
Sovereign 6,914,941 64.1
Quasi & Foreign Govt. 852,231 7.9
Securitized/Collateralized 1,326,892 12.3
Corporate 1,564,222 14.5
High-Yield/Emerging Mkt. 140,241 1.3
Total 10,798,527 100.0
C. Japanese Yen
Sovereign 4,659,743 81.4
Quasi & Foreign Govt. 429,337 7.5
Securitized/Collateralized 5,724 0.1
Corporate 635,420 11.1
High-Yield/Emerging Mkt. - 0.0
Total 5,730,224 100.0
D. Pound Sterling
Sovereign 792,517 50.2
Quasi & Foreign Govt. 202,076 12.8
Securitized/Collateralized 94,723 6.0
Corporate 472,037 29.9
High-Yield/Emerging Mkt. 17,366 1.1
Total 1,578,719 100.0
Discuss the positives and negatives of investing in a government agency issue rather than a straight Treasury bond.