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Bond Calculations

Complete problems: 1, 2, 3, 5, 6, 8, & 11 on text pp. 274-276 of Ch. 8.

1. Determine the value of a $1,000 denomination Bell South bond with a 7
percent coupon rate maturing in 20 years for an investor whose required rate
of return is:
a. 8 percent
b. 7 percent
c. 5 percent

2. Consider Allied Signal Corporation's percent bonds that mature on June 1,
2010. Assume that the interest on these bonds is paid and compounded
annually. Determine the value of a $1,000 denomination Allied Signal
Corporation bond as of June 1, 2004, to an investor who holds the bond until
maturity and whose required rate of return is:
a. 7 percent
b. 9 percent
c. 11 percent
d. What would be the value of the Allied Signal Corporation bonds at an 8
percent required rate of return if the interest were paid and compounded
semiannually?

3. Southern Bell has issued percent bonds that mature on August 1, 2011.
Assume that interest is paid and compounded annually. Determine the yield
to maturity if an investor purchases a $1,000 denomination bond for $853.75
on August 1, 2004.

5. Consider the Allied Signal Corporation zero coupon money multiplier notes
of 2008. The bonds were issued on July 1, 1990, for $100. Interest is paid every
July 1 and the bond matures on July 1, 2008. Determine the yield to maturity if
the bonds are purchased at the:
a. Issue price in 1990
b. Market price as of July 1, 2004, of $750
c. Explain why the returns calculated in (a) and (b) are different.

6. If you purchase a zero coupon bond today for $225 and it matures at $1,000 in
11 years, what rate of return will you earn on that bond (to the nearest 10th of
1 percent)?

8. AT&T Corporation has several issues of bonds outstanding. One of the
outstanding bonds has a 5 percent coupon and matures in 2004. The bonds
mature on April 1 in the maturity year. Suppose an investor bought this bond
on April 1, 1999, and assume interest is paid annually on April 1. Calculate the
yield to maturity assuming the investor buys the bond at the following price, as
quoted in the financial press:
a. 100
b. 90
c. 105

11. The following bond quotations are taken from the Wall Street Journal dated
Friday, September 5, 2003:

Company Coupon Maturity Last Price Yield
International Paper (IP) 6.750 Sep 01, 2011 108.198 5.468
Sara Lee (SLE) 3.875 Jun 15, 2013 89.700 5.235
Wells Fargo (WFC) 7.250 Aug 24, 2005 109.645 2.191
General Motors (GM) 7.125 Jul 15, 2013 101.201 6.952
Lincoln National (LNC) 6.200 Dec 15, 2011 105.903 5.307

a. Explain why the International Paper bond is selling at a premium but the
Sara Lee is selling at a discount.
b. Why is the yield (yield to maturity) on the General Motors bond so much
higher than the yield on the Sara Lee bond?
c. Why is the yield (yield to maturity) on the Wells Fargo Bank bond so much
less than the yield on the Lincoln National Corp. bond?

Solution Preview

Please see the attached file

1.
The value is the present value of interest and principal discounted at the required return.
The value can be calculated using the PV function
Part A
Par Value 1,000
Required Return 8%
Annual Interest 70
Maturity 20 years
Value $901.82

Part B
Par Value 1,000
Required Return 7%
Annual Interest 70
Maturity 20 years
Value $1,000.00

Part A
Par Value 1,000
Required Return 5%
Annual Interest 70
Maturity 20 years
Value $1,249.24

2.
The value is the present value of interest and principal discounted at the required return.
The value can be calculated using the PV function
Part A
Par Value 1,000
Required Return 7%
Annual Interest 98.75 Based on 9 7/8% interest rate
Maturity 6 years 2004 to 2010
Value $1,137.04

Part B
Par Value 1,000
Required Return 9%
Annual Interest 98.75
Maturity 6 years
Value $1,039.25

Part C
Par Value 1,000 ...

Solution Summary

The solution has various problems relating to bond calculations.

$2.19