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Chapter 16
Problems
(Assume the par value of the bonds in the following problems is $1,000 unless otherwise
specified.)
16A.
The Pioneer Petroleum Corporation has a bond outstanding with an $85 annual interest
payment, a market price of $800, and a maturity date in five years. Find the following:
a
.
The coupon rate.
b
.
The current rate.
c
.The approximate yield to maturity.
16A. Solution:
The Pioneer Petroleum Company
a.
$85 interest/$1,000 par = 8.5% coupon rate
b.
$85 interest/$800 market price = 10.625% current yield
c.
Approximate yield to maturity = (Y')
payment)
(Principal
.4
bond)
the
of
(Price
.6
maturity
to
years
of
Number
bond
the
of
Price
payment
Principal
payment
interest
Annual
)
Y'
(
+

+
=
$1,000 $800
$85
5
.6($800)
.4($1,000)
$200
$85
5
$480
$400
$85 $40
$880
$125
14.20%
$880

+
=
+
+
=
+
+
=
=
=
S161
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View Full Document 16B.
Harold Reese must choose between two bonds:
Bond X pays $95 annual interest and has a market value of $900. It has 10 years
to maturity.
Bond Z pays $95 annual interest and has a market value of $920. It has two years
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This note was uploaded on 07/03/2011 for the course BUS 320 taught by Professor Sloan during the Summer '08 term at N.C. State.
 Summer '08
 sloan
 Interest

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