Chapter 9

Section 9.1
1. Same as; more than; less than
2. Decrease; no, a bond sold at discount has its book value increasing over time.
3. The present value of both the future coupon payments and the redemption price.
4. Interest and principal
5. 0
6. $972.46
7. $990.36
8. Accrued interest = $20.50; amortization of premium = $4.50
9. $50
10. 2%
11. a. $986.23 b. $990.60 c. $22.50 d. accrued interest = $24.76; accumulation of discount =
$2.26
12. a. $1,056.01 b. $1,038.08 c. $30 d. accrued interest = $20.76; amortization of premium =
$9.24
13. a. $1,000 b. $1,000 c. $25 d. accrued interest = $25; accumulation of discount/premium
= $0
14.

Half-year Coupon Interest Accumulation Book value

payment accrued of discount
0 $981.19
1 $20 $24.53 $4.53 $985.72
2 $20 $24.64 $4.64 $990.36
3 $20 $24.76 $4.76 $995.12
4 $20 $24.88 $4.88 $1,000
15.

Half-year Coupon Interest Amortization Book value

payment accrued of premium
0 $1,019.04
1 $25 $20.38 $4.62 $1,014.42
2 $25 $20.29 $4.71 $1,009.71
3 $25 $20.19 $4.81 $1,004.90
4 $25 $20.10 $4.90 $1,000
16.

Half-year Coupon Interest Accumulation Book value

payment accrued of discount
0 $1,000
1 $20 $20 0 $1,000
2 $20 $20 0 $1,000
3 $20 $20 0 $1,000
4 $20 $20 0 $1,000

Section 9.2
 1. The bond issuer can pay the bond off early, before the redemption date.
2. European option – the bond issuer can redeem the bond at one specified date
Bermuda option – the bond issuer can redeem the bond at multiple specified dates
American option – the bond issuer can redeem the bond during a range of dates.
3. Down
4. The redemption value and the call premium.
5. No
6. $510; $510,000
7. $1,009.78; 758
8. $1,014.42; 1,006
9. $10,000; $510,000
10. $75,000; $5,075,000
11. a. $510; $510,000 b. $507.36 c. 1,005 d. (see below) e. The total loss would be $2,600.

Time Keep original bond Refinance Savings (Loss)

(1,000 bonds sold) (1,005 bonds sold)
3rd half year $10,000 $10,050 ($50)
4th half year $510,000 $512,550 ($2,550)
Total $520,000 $522,600 ($2,600)

12. a. $1,025; $5,125,000 b. $992.71 c. 5,163 d. (see below) e. The total loss would be
$167,890.

Time Keep original bond Refinance Savings (Loss)

(5,000 bonds sold) (5,163 bonds sold)
3rd half year $75,000 $77,445 ($2,445)
4th half year $5,075,000 $5,240,445 ($165,445)
Total $5,150,000 $5,317,890 ($167,890)

13. a. $1,020; $10,200,000 b. $1,022.04 c. 9,978 d. (see below) e. The total loss would be
$76,900.
f. Refinancing was not advantageous in this case because the coupon rate increased. If
the number of bonds sold is less than the number currently issued, in order for
refinancing to be advantageous, the terms must be the same as the original bond.

Time Keep original bond Refinance Savings (Loss)

(1,000 bonds sold) (9,978 bonds sold)
3rd half year $200,000 $249,450 ($49,450)
4th half year $10,200,000 $10,227,450 ($27,450)
Total $10,400,000 $10,476,900 ($76,900)
14. a. $1,015; $10,150,000 b. $1,024.16 c. 9,911 d. (see below) e. The total savings would
be $96,120.

Time Keep original bond Refinance Savings (Loss)

(10,000 bonds sold) (9,911 bonds sold)
3rd half year $200,000 $198,220 $1,780
4th half year $200,000 $198,220 $1,780
5th half year $200,000 $198,220 $1,780
6th half year $10,200,000 $10,109,220 $90,780
Total $10,800,000 $10,703,880 $96,120
15. The total loss for the company would be $28,080.

Section 9.3
1. Because there is only one single cash flow.
2. Spot rates are different for each cash flow.
3. A spot rate is often an average rate over multiple periods; forward rate is not.
4. f3,4 is the anticipated market interest rate on money invested at time 3 and held until time
4.
5. s2 – the larger proportion of the payout of the bond occurs at the end of the second
period, and so the yield rate will be pulled towards the two-year spot rate.
6. s 1=s2=s 3=0.02 ; yield rate = 0.02
7. √
D. s 2= ( 1+ f 0,1 ) ( 1+ f 1,2 ) −1
8. $500.19
9. s 2=0.0375
10. s 3=0.1662
11. f 2,3=2.00
12. $15
13. a. $976.41 b. 3.237% c. f 0,1=2.0 d. f 1,2 =4.515
14. a. $971.71 b. s 3=3.004 c. f 0,1=2 d. f 1,2 =4.515 e. f 2,3=2.514
15. s 1=2 ; s 2=2.25 ; s 3=2.5 b. $985.91 c. 2.493%
16. a. s 2=2.524 b. f 0,1=2 c. f 1,2 =3.051 d. yield rate = 2.519%
17. a. $986.97 b. 3.465% c. f 0,1=2 d. f 1,2 =3.00 e. f 2,3=5.529

End of chapter
1. B
2. B
3. C
4. B
5. C
6. B
7. E
8. B
9. A
10. A
11. A
12. E
13. A
14. E
15. C
16. B
17. E
18. C
19. C
20. B
21. E
22. D