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1) Bond prices and yields Assume that the Financial Management Corporations $ 1,000- par- value bond had a 5.700% coupon, matured on May 15, 2017, had a current price quote of 97.708, and had a yield to maturity ( YTM) of 6.034%. Given this information, answer the following questions. a. What was the dollar price of the bond? b. What is the bonds current yield? c. Is the bond selling at par, at a discount, or at a premium? Why? d. Compare the bonds current yield calculated in part b to its YTM and explain why they differ.

2) Valuation fundamentals Imagine that you are trying to evaluate the economics of purchasing an automobile. You expect the car to provide annual after- tax cash benefits of $ 1,200 at the end of each year, and assume that you can sell the car for after-tax proceeds of $ 5,000 at the end of the planned 5- year ownership period. All funds for purchasing the car will be drawn from your savings, which are currently earning 6% after taxes. a. Identify the cash flows, their timing, and the required return applicable to valuing the car. b. What is the maximum price you would be willing to pay to acquire the car? Explain.

4) Basic bond valuation Complex Systems has an outstanding issue of $ 1,000- par-value bonds with a 12% coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date. a. If bonds of similar risk are currently earning a 10% rate of return, how much should the Complex Systems bond sell for today? b. Describe the two possible reasons why the rate on similar- risk bonds is below the coupon interest rate on the Complex Systems bond. c. If the required return were at 12% instead of 10%, what would the current value of Complex Systems bond be? Contrast this finding with your findings in part a and discuss.

6) Bond value and changing required returns Midland Utilities has outstanding a bond issue that will mature to its $ 1,000 par value in 12 years. The bond has a coupon interest rate of 11% and pays interest annually. a. Find the value of the bond if the required return is ( 1) 11%, ( 2) 15%, and ( 3) 8%. b. Plot your findings in part a on a set of required return ( x axis) market value of bond ( y axis) axes. c. Use your findings in parts a and b to discuss the relationship between the coupon interest rate on a bond and the required return and the market value of the bond relative to its par value. d. What two possible reasons could cause the required return to differ from the coupon interest rate?

8) Yield to maturity The Salem Company bond currently sells for $ 955, has a 12% coupon interest rate and a $ 1,000 par value, pays interest annually, and has 15 years to maturity. a. Calculate the yield to maturity ( YTM) on this bond. b. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond.

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Solution Summary

Bond YTM is clearly determined in this case.