Assume the bonds pay annual interest

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Question

1. One bond has a coupon rate of 8%, another a coupon rate of 12%. Both bonds have 10-year maturities and sell at a yield to maturity of 10%. If their yields to maturity next year are still 10%, what is the rate of return on each bond? Does the higher coupon bond give a higher rate of return? Assume the bonds pay annual interest.

2. The quoted price of a bond with a coupon rate of 4.5%, payable semi-annually, maturing on March 1, 2023, is $990. The last coupon payment was made on March 1, 2019. If you buy the bond on July 1, 2019, what is the total price you must pay for the bond?

3. A company's bond carries a coupon rate of 8%, payable semi-annually, has 9 years until maturity, and sells at a yield to maturity of 9%.

a. What interest payments to bondholders receive each year?

b. At what price does the bond sell?

c. What will happen to the bond price if the yield to maturity falls to 7%?

4. You bought a 10-year, 5% coupon bond for $1,000 and sold it 1 year later for $1,100. What is the rate of return on your investment if the bond pays interest annually? If your marginal tax rate is 30%, and 50% of capital gains are taxable, what is the after-tax rate of return on your bond investment?

5. A 30-year maturity bond with $1,000 face value makes annual coupon payments and has a coupon rate of 8%. What is the bond's yield to maturity if the bond is selling for

a. $900?

b. $1,000?

c. $1,100?

What if the bond makes semi-annual coupon payments.

6. Fill in the table below for the following zero-coupon bonds. The face value of each bond is $1,000.

Price Maturity (years) YTM 300 30.0 .... 300 15.64 .... 385.54 10.0 .....

7. Several years ago, Castles in the Sand, Inc., issued bonds at face value at a yield to maturity of 7%. Now, with 8 years left until the maturity of the bonds, the company has run into hard times, and the yield to maturity on the bonds has increased to 15%.

a. What has happened to the price of the bond? Coupons are paid semi-annually.

b. Suppose that investors believe that Castles can make good on the promised coupon payments, but that the company will go bankrupt when the bond matures, and the principal comes due. The expectation is that investors will receive only 80% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive?

8. Bond Returns. You buy an 8% coupon, paid annually, 10-year maturity bond for $980. A year later, the bond price is $1,100.

a. What is the yield to maturity on the bond today? What is it in one year? b. What is your rate of return over the year?

9. You buy an 8% annual coupon, 20-year maturity bond when its yield to maturity is 9%. A year later, the yield to maturity is 10%. What is your rate of return over the year?

10. Suppose interest rates increase from 8% to 9%. Which bond will suffer the greater percentage decline in price: a 30-year bond paying annual coupons of 8%, or a 30-year zero-coupon bond? Can you explain intuitively why the zero exhibits greater interest rate risk even though it has the same maturity as the coupon bond?

Reference no: EM133674210

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