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ECON_134b_-_Section_Handout_Bond_Valuation - (Ignore tax...

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ECON 134b: Bond Valuation Practice Problems Q1. Which security has a higher effective annual interest rate? a) 3-month T-bill selling at $97,645 with par value $100,000 b) Coupon bond selling at par and paying a 10% coupon semiannually Q2. A 10-year bond of a firm in severe financial distress has a coupon rate of 14% and is selling for $900. The firm is currently renegotiating the debt and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What is the stated and expected yield to maturity of the bonds? The bond makes its coupon payments annually. Q3. A newly issued bond pays its coupon once annually. Its coupon rate is 5%, its maturity is 20 years and its yield to maturity is 8%. a) Find the holding period return for a 1 year investment period if the bond is selling at a yield to maturity of 7% by the end of the year.
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Unformatted text preview: (Ignore tax considerations) b) Find the realized compound yield before taxes for a 2-year holding period, assuming (1) you sell the bond after 2 years, (2) the bond yield is 7% at the end of the second year and (3) the coupon can be reinvested for 1 year at a 3% interest rate. Q4. A convertible bond has the following features: Coupon: 5.25% Maturity: June 15, 2007 Market Price of Bond: $775.00 Market Price of Underlying Common Stock: $28.00 Annual Dividend: $1.20 Conversion Ratio: 20.83 shares Calculate the conversion premium for this bond. Q5. Heres a breakdown of payments for a TIPS with a coupon rate a 4%: Time Inflation Par Value Coupon Payment Principal Repayment Total Payment 1000.0 1 2% 1020.00 40.80 40.80 2 3% 1050.60 42.02 42.02 3 1% 1061.11 42.44 1061.11 1103.55 What were the real and nominal rates of return in years 1, 2, and 3?...
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