Homework 02

Finn 200 – Fall 2014

Due Date: September 22, 2014

Questions (9th Edition)

6. Bond Yields A Japanese Company has a bond outstanding that sells for 87 percent of its
¥100,000 par value. The bond has a coupon rate of 5.4 percent paid annually and matures in 21
years. What is the yield to maturity of this bond?

Answer: R = 6.56%

10. Nominal versus Real Returns Say you own an asset that had a total return last year of 14.1
percent. If the inflation rate last year was 6.8 percent, what was your real return?

Answer: r= 6.84%

12. Using Treasury Quotes Locate the Treasury bond in Figure 8.4 maturing in November 2024. Is
this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is
the bid-ask spread?

Answer:

Current yield = 5.57%

YTM is 4.4817%

Bid-Ask spread = 1/32

13. Bond Price Movements Miller Corporation has a premium bond making semiannual payments.
The bond pays a 9 percent coupon, has a YTM of 7 percent, and has 13 years to maturity. The
Modigliani Company has a discount bond making semiannual payments. This bond pays a 7 percent
coupon, has a YTM of 9 percent, and also has 13 years to maturity. If interest rates remain
unchanged, what do you expect the price of these bonds to be 1 year from now? In 3 years? In 8
years? In 12 years? In 13 years? What’s going on here? Illustrate your answers by graphing bond
prices versus time to maturity.

Answer:
Miller Corporation bond:

P3 = $45(PVIFA3.5%,20) + $1,000(PVIF3.5%,20) = $1,142.12

Modigliani Company bond:

P3 = $35(PVIFA4.5%,20) + $1,000(PVIF4.5%,20) = $869.92

17. Bond Yields Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion
projects. The company currently has 10 percent coupon bonds on the market that sell for $1,063,
make semiannual payments, and mature in 20 years. What coupon rate should the company set on
its new bonds if it wants them to sell at par?

Answer:

YTM = 9.30%

25. Valuing Bonds The Morgan Corporation has two different bonds currently outstanding. Bond M
has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six
years, then pays $800 every six months over the subsequent eight years, and finally pays $1,000
every six months over the last six years. Bond N also has a face value of $20,000 and a maturity of
20 years; it makes no coupon payments over the life of the bond. If the required return on both
these bonds is 8 percent compounded semiannually, what is the current price of Bond M? Of Bond
N?

Answer:

PM = $13,117.88

PN = $20,000(PVIF4%,40) = $4,165.78