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Various questions on bond valuation and yield

1. Bond valuation Callaghan Motors' bonds have 10 years remaining to maturity. Interest
is paid annually; they have a $1,000 par value; the coupon interest rate is 8 percent; and
the yield to maturity is 9 percent. What is the bond's current market price?

2. Current yield and yield to maturity A bond has a $1,000 par value, 10 years to maturity,
a 7 percent annual coupon, and sells for $985.
a. What is its current yield?
b. What is its yield to maturity (YTM)?
c. Assume that the yield to maturity remains constant for the next 3 years. What will the price be 3 years from today?

3. Bond valuation Nungesser Corporation's outstanding bonds have a $1,000 par value, a 9 percent semiannual coupon, 8 years to maturity, and an 8.5 percent YTM. What is the bond's price?

4. Current yield, capital gains yield, and yield to maturity Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8 percent annual coupon rate and were issued 1 year ago at their par value of $1,000, but due to changes in interest rates, the bond's market price has fallen to $901.40. The capital gains yield last year was 9.86 percent.
a. What is the yield to maturity?
b. For the coming year, what is the expected current yield and the expected capital gains yield?
c. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?

5. Yield to call Six years ago, the Singleton Company issued 20-year bonds with a 14 percent annual coupon rate at their $1,000 par value. The bonds had a 9 percent call premium, with 5 years of call protection. Today, Singleton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held
them until they were called. Explain why the investor should or should not be happy that Singleton called them.

Solution Preview

1. Bond valuation Callaghan Motors' bonds have 10 years remaining to maturity. Interest
is paid annually; they have a $1,000 par value; the coupon interest rate is 8 percent; and
the yield to maturity is 9 percent. What is the bond's current market price?

The current market price is the present value of interest and the principal. The interest amount is $80, principal amount is $1,000. The time period is 10 years and the discounting rate is 9%. The current price is
Current price = 80 X PVIFA (10,9%) + 1,000 X PVIF (10,9%)
Current Price = 80 X 6.418 + 1,000 X 0.422
Current Price = $935.82

2. Current yield and yield to maturity A bond has a $1,000 par value, 10 years to maturity,
a 7 percent annual coupon, and sells for $985.
a. What is its current yield?

Current Yield = Annual Interest/Price
= 70/985 = 7.11%

b. What is its yield to maturity (YTM)?

The YTM is the discounting rate that will make the PV of interest and principal equal to ...

Solution Summary

The solution explains the calcualtions relation to bond valuation, yield to maturity, current yield, capital gains yield and realized rate of return

$2.19