Description
Answer the Module 4 Problem Set questions using the Excel spreadsheet provided.
For all yields, please go to four (4) significant digits (e.g. 3.4576%).
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MGMT 332
Corporate Finance I
Module 4: Interest Rates and Bond Valuation
Problem Set 4 – Interest Rates and Bond Valuation
1. What is the annual yield of a 7-year, 4.5% semi-annual coupon-paying bond priced
today at $1,235? Par is $1,000.
2. What is the annual yield of a 10-year, 7.25% annual coupon-paying bond priced today
at $655? Par is $1,000.
3. Show the cash flows and prices for the following four bonds, each with a par value of
$1,000 and paying interest semi-annually:
#
Coupon Rate
Years to Maturity
Market Yield
A
2.88%
9
6.15
B
2.35%
5
4.8
C
3.22%
3
2.2
D
0.0%
10
3.1
Which of the four bonds would you prefer to hold and why? (Answer in the box provided.)
4. Consider a semi-annual bond with an annual coupon = 1.85%, maturity = 8
years, par value = $1,000, and a market price today = $633:
a. What is its yield to maturity (YTM)?
b. Suppose the bond can be called at $750 at the end of year 5, what is its
yield to call?
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November 2020 | MGMT 332 | College of Business | worldwide.erau.edu
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5. You have two bonds with the following characteristics:
Characteristics
Bond A
Bond B
Coupon
3.50%
3.00%
Yield to Maturity
3.4334%
3.3320%
Years to Maturity
5
7
Par Value
$1,000
$1,000
Price
$925.00
$980.00
a. What are the bond durations?
b. If rates rise to 3.55%, what are the new prices for each bond?
Page 2 of 2
CF
Coupon
Par
Start
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Yield
$
CF
Coupon
Par
Start
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Yield
$
A
Yield
Price
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
B
C
D
a
Coupon
Par
YTM
Start
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
b
a. Duration
A
B
b. Price at 3.55%
A
YTM
Coupon
Par
Start
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Price @3.55%
B
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Explanation & Answer
I finished. Please look at the work, and I'll be here if you have any doubts.
CF
Coupon
Par
Start
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Yield
$
2.25%
1,000.00
(1,235.00)
22.50
22.50
22.50
22.50
22.50
22.50
22.50
22.50
22.50
22.50
22.50
22.50
22.50
1,022.50
1.0138%
I used the IRR function to solve this problem.
The YTM is expressed as an annual yield.
CF
Coupon
Par
Start
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Yield
$
3.6250%
1,000.00
(655.00)
36.25
36.25
36.25
36.25
36.25
36.25
36.25
36.25
36.25
1,036.25
18.0021%
I used the IRR function to solve this ...
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