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Unformatted text preview: Solutions to EndofChapter Problems (Not: Problem numbers are based on the Concise Sixth Edition of the Text. Problem numbers included in the parentheses are those corresponding to the Fifth Edition.) 72 from the sixth edition (72 from the fifth edition) V B = $985; M = $1,000; Int = 0.07 $1,000 = $70. a. Current yield = Annual interest/Current price of bond = $70/$985.00 = 7.11%. b. N = 10; PV = 985; PMT = 70; FV = 1000; YTM = ? Solve for I/YR = YTM = 7.2157% 7.22%. c. N = 7; I/YR = 7.2157; PMT = 70; FV = 1000; PV = ? Solve for V B = PV = $988.46. 74 (74) With your financial calculator, enter the following to find YTM: N = 10 2 = 20; PV = 1100; PMT = 0.08/2 1,000 = 40; FV = 1000; I/YR = YTM = ? YTM = 3.31% 2 = 6.62%. With your financial calculator, enter the following to find YTC: N = 5 2 = 10; PV = 1100; PMT = 0.08/2 1,000 = 40; FV = 1050; I/YR = YTC = ? YTC = 3.24% 2 = 6.49%. Since the YTC is less than the YTM, investors would expect the bonds to be called and to earn the YTC. 75 (75) a. 1. 5%: Bond L: Input N = 15, I/YR = 5, PMT = 100, FV = 1000, PV = ?, PV = $1,518.98. Bond S: Change N = 1, PV = ? PV = $1,047.62. Chapter 7: Bonds and Their Valuation Answers and Solutions 1 2. 8%: Bond L: From Bond S inputs, change N = 15 and I/YR = 8, PV = ?, PV = $1,171.19. Bond S: Change N = 1, PV = ? PV = $1,018.52. 3. 12%: Bond L: From Bond S inputs, change N = 15 and I/YR = 12, PV = ?, PV = $863.78. Bond S: Change N = 1, PV = ? PV = $982.14. Chapter 7: Bonds and Their Valuation Answers and Solutions 2 b. Think about a bond that matures in one month. Its present value is influenced primarily by the maturity value, which will be received in only one month. Even if interest rates double, the price of the bond will still be close to $1,000. A 1year bonds value would fluctuate more than the onemonth bonds value because of the difference in the timing of receipts. However, its value would still be fairly close to $1,000 even if interest rates doubled. A longterm bond paying semiannual coupons, on the other hand, will be dominated by distant receipts, receipts that are multiplied by 1/(1 + r d /2) t , and if r d increases, these multipliers will decrease significantly. Another way to view this problem is from an opportunity point of view. A 1month bond can be reinvested at the new rate very quickly, and hence the opportunity to invest at this new rate is not lost; however, the longterm bond locks in subnormal...
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 Spring '07
 Chen
 Finance

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