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07problem
3/22/2010 7:10
12/14/2005
Chapter 7.
Solution to EndofChapter Comprehensive/Spreadsheet Problem
Problem 721
Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds.
His
financial planner has suggested the following bonds:
Each bond has a yield to maturity of 9 percent.
a.
Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, discount,
or at par.
Bond A is selling at a discount because its coupon rate (7%) is less than the going interest rate (YTM = 9%).
Bond B is selling at par because its coupon rate (9%) is equal to the going interest rate (YTM = 9%).
Bond C is selling at a premium because its coupon rate (11%) is greater than the going interest rate (YTM = 9%).
Work parts b through e with a spreadsheet.
You can also work these parts with a calculator to check your
spreadsheet answers if you aren't confident of your spreadsheet solution.
You must then go on to work
part g with the spreadsheet.
b.
Calculate the price of each of the three bonds.
Basic Input Data:
Bond A
Bond B
Bond C
Years to maturity:
12
12
12
Periods per year:
1
1
1
Periods to maturity:
12
12
12
Coupon rate:
7%
9%
11%
Par value:
$1,000
$1,000
$1,000
Periodic payment:
$70
$90
$110
Yield to maturity:
9%
9%
9%
$856.79
$1,000.00
$1,143.21
c.
Calculate the current yield for each of the three bonds.
Current yield = Annual coupon / Price
Bond A
Bond B
Bond C
Current yield
=
8.17%
9.00%
9.62%
d.
If the yield to maturity for each bond remains at 9 percent, what will be the price of each bond 1 year from now?
What is the expected capital gains yield for each bond?
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 Spring '10
 woo
 Management

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