نه ن e. zero coupon bonds. 15-year bonds with a 10% coupon. BLEMS 7-1 blems 7-2 a. b. BOND VALUATION Callaghan Motors's bonds have 10 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 8%; and the yield to maturity is 9%. What is the bond's current market price? YIELD TO MATURITY AND FUTURE PRICE A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon and sells for $985. What is its yield to maturity (YTM)? Assume that the yield to maturity remains constant for the next three years. What will the price be 3 years from today? BOND VALUATION Nungesser Corporation's outstanding bonds have a $1,000 par value, a 9% semiannual coupon, 8 years to maturity, and an 8.5% YTM. What is the bond's price? YIELD TO MATURITY A firm's bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,050, and currently sell at a price of $1,100. What are their nominal yield to maturity and their nominal yield to call? What return should investors expect to earn on these bonds? 7-3 7-4 ermediate blems 4 a. 7-5 BOND VALUATION An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year. What will the value of each bond be if the going interest rate is 5%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 15 more payments are to be made on Bond L. b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? 7-6 BOND VALUATION An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9.6%. Bond C pays a 10% annual coupon, while Bond Z is a zero coupon bond. Assuming that the yield to maturity of each bond remains at 9.6% over the next 4 years, calculate the price of the bonds at each of the following years to maturity: Years to Maturity Price of Bond C Price of Bond Z a. 4 Ν ω 1 0 b. Plot the time path of prices for each bond. 7-7 INTEREST RATE SENSITIVITY An investor purchased the following 5 bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell , and each then had a new YTM of 7%. What is the percentage change in price for each bond after the decline in interest rates? Fill in the following table: Price @8% Percentage Change Price @7% 10-year, 10% annual coupon 10-year zero 5-year zero 30-year zero $100 perpetuity 3 Financial Assets 7-8 YIELD TO CALL Six years ago the Singleton Company issued 20-year bonds with a 14% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Singleton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Explain why the investor should or should not be happy that Singleton called them. a. 7-9 YIELD TO MATURITY Heymann Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%. What is the yield to maturity at a current market price of (1) $829 and (2) $1,104? b. Would you pay $829 for each bond if you thought that a "fair" market interest rate for such bonds was 12%—that is, if ra 12%? Explain your answer. 7-10 CURRENT YIELD, CAPITAL GAINS YIELD, AND YIELD TO MATURITY Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $901.40. The capital gains yield last year was -9.86%. What is the yield to maturity? b. For the coming year, what are the expected current and capital gains yields? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ? 7-11 BOND YIELDS Last year Clark Company issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 4 years at a price of $1,060 and it sells for $1,100. a. C. a. C. 7-12 What are the bond's nominal yield to maturity and its nominal yield to call? Would an investor be more likely to earn the YTM or the YTC? b. What is the current yield? Is this yield affected by whether the bond is likely to be called? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) What is the expected capital gains (or loss) yield for the coming year? Is this yield dependent on whether the bond is expected to be called? Explain your answer. YIELD TO CALL It is now January 1, 2015, and you are considering the purchase of an outstanding bond that was issued on January 1, 2013. It has a 9.5% annual coupon and had a 30-year original maturity. (It matures on December 31, 2042.) There is 5 years of call protection (until December 31, 2017), after which time it can be called at 109—that is, at 109% of par, or $1,090. Interest rates have declined since it was issued, and it is now selling at 116.575% of par, or $1,165.75. What is the yield to maturity? What is the yield to call? b. If you bought this bond, which return would you actually earn? Explain your reasoning. c. Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have been most likely? face value of $1,000 and a current yield of 8.21% What are th PRICE AND YIELD An 8% semiannual coupon bond matures in 5 years. The band has a a. 7-13
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