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7-3 The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Is that statement true or false? Explain. (Hint: Make up a "reasonable" example based on a 1-year and a 20-year bond to help answer the question.)
7-5 If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been callable? Explain.
7-1 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%, and the yield to maturity is 9%. What is the bond's current market price?
7-9 YIELD TO MATURITY Heymann Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.
a. What is the yield to maturity at a current market price of (1) $829 and (2) $1,104?
b. Would you pay $829 for each bond if you thought that a "fair" market interest rate for such bonds was 12%-that is, if rd = 12%? Explain your answer.
7-13 PRICE AND YIELD An 8% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 8.21%. What are the bond's price and YTM? (Hint: Current yields is the annual interest payment divided by the current price.)© BrainMass Inc. brainmass.com October 25, 2018, 2:54 am ad1c9bdddf
The solution explains some questions relating to bond calculations
Callaghan Motors' bonds have 10 years remaining to maturity.
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7-1 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?
7-2 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 willthe price be 3 years from today?
7-3 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?
7-8 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.
7-10 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?