Solutions to Chapter 5
Valuing Bonds
1.
a.Coupon rate = 6%, which remains unchanged.
The coupon payments are fixed at
$60 per year.
b.
When the market yield increases, the bond price will fall.
The cash flows are
discounted at a higher rate.
c.At a lower price, the bond’s yield to maturity will be higher.
The higher yield to
maturity for the bond is commensurate with the higher yields available in the
rest of the bond market.
d.
Current yield = coupon rate/bond price
As coupon rate remains the same and the bond price decreases, the current
yield increases.
2.
When the bond is selling at a discount, $970 in this case, the yield to maturity is
greater than 8%.
We know that if the yield to maturity were 8%, the bond would sell
at par.
At a price below par, the yield to maturity exceeds the coupon rate.
Current yield = coupon payment/bond price = $80/$970
Therefore, current yield is also greater than 8%.
3.
Coupon payment = 0.08
×
$1,000 = $80
Current yield = $80/bond price = 0.07
Therefore: bond price = $80/0.07 = $1,142.86
4.
Coupon rate = $80/$1,000 = 0.080 = 8.0%
Current yield = $80/$950 = 0.0842 = 8.42%
To compute the yield to maturity, use trial and error to solve for r in the following
equation:
6
6
)
r
1
(
000
,
1
$
r)
(1
r
1
r
1
$80
$950
+
+
+
×

×
=
⇒
r = 9.119%
Using a financial calculator, compute the yield to maturity by entering:
n = 6; PV = (

)950; FV = 1000; PMT = 80, compute i = 9.119%
51
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 Spring '08
 Gani,Marcel

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