hinsafdar

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. What is the value of the bond today if the coupon rate is 8%?

A) $1,221.17.

B) $1,144.31.

C) $922.78.

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FV = 1,000; N = 10; PMT = 40; I = 5; CPT → PV = 922.78.

hinsafdar

What value would an investor place on a 20-year, $1,000 face value, 10% annual coupon bond, if the investor required a 9% rate of return?

A) $1,091.

B) $920.

C) $879.

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N = 20; I/Y = 9; PMT = 100 (0.10 × 1,000); FV = 1,000; CPT → PV = 1,091.

hinsafdar

An investor buys a 10% semi annual coupon, 10-year bond for $1,000. The coupons can be reinvested at 12%. The investor estimates that the bond will be sold in 3 years $1,050.
Based on this information, what would be the average annual rate of return over the 3 years?

A) 13.5%.

B) 9.5%.

C) 11.5%.

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1. Find the FV of the coupons and interest on interest:

N = 3(2) = 6; I = 12/2 = 6; PMT = 50; CPT → FV = 348.77

2. Determine the value of the bond at the end of 3 years:

1,050.00 (given) + 348.77 (computed in step 1) = 1,398.77

3. Equate FV (1,398.77) with PV (1,000) over 3 years (N = 6); CPT → I = 5.75(2) = 11.5%

hinsafdar

Given a required yield to maturity of 6%, what is the intrinsic value of a semi-annual pay coupon bond with an 8% coupon and 15 years remaining until maturity?

A) $1,095.

B) $1,196.

C) $1,202.

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This problem can be solved most easily using your financial calculator. Using semiannual payments, I = 6/2 = 3%; PMT = 80/2 = $40; N = 15 × 2 = 30; FV = $1,000; CPT → PV = $1,196.

hinsafdar

Which of the following statements about a bond’s cash flows is most accurate? The appropriate discount rate is a function of:

A) only the return on the market.

B) the risk-free rate plus the return on the market.

C) the risk-free rate plus the risk premium.

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The return on the market would be used only when discounting the cash flows of the market. The risk premium reflects the cost of any incremental risk incurred by the investor above and beyond that of the risk-free security.

hinsafdar

A bond with a face value of $1,000 pays a semi-annual coupon of $60. It has 15 years to maturity and a yield to maturity of 16% per year. What is the value of the bond?

A) $697.71.

B) $832.88.

C) $774.84.

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FV = 1,000; PMT = 60; N = 30; I = 8; CPT → PV = 774.84

hinsafdar

Georgia-Pacific has $1,000 par value bonds with 10 years remaining maturity. The bonds carry a 7.5% coupon that is paid semi-annually. If the current yield to maturity on similar bonds is 8.2%, what is the current value of the bonds?

A) $1,123.89.

B) $952.85.

C) $569.52.

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The coupon payment each six months is ($1,000)(0.075 / 2) = $37.50. To value the bond, enter FV = $1,000; PMT = $37.50; N = 10 × 2 = 20; I/Y = 8.2 / 2 = 4.1%; CPT → PV = –952.85.

hinsafdar

What value would an investor place on a 20-year, 10% annual coupon bond, if the investor required a 10% rate of return?

A) $1,104.

B) $1,000.

C) $920.

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N = 20; I/Y = 10; PMT= 100; FV = 1,000; CPT → PV = 1,000

hinsafdar

What is the present value of a 7% semi-annual pay corporate bond with a $1,000 face value and 20 years to maturity if it is yielding 6.375%? If a municipal bond is yielding 4.16% and an investors marginal tax rate is 35%, would the investor prefer the corporate bond or the municipal bond?

Value

Investor preference

A) $1,121.23 municipal bond

B) $1,070.09 corporate bond

C) $1,070.09 municipal bond

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N = 20 × 2 = 40; I/Y = 6.375/2 = 3.1875; PMT = 70/2 = 35; FV = 1,000; CPT → PV = $1,070.09.
The taxable-equivalent yield on the municipal bond is: 4.16% / (1 − 0.35) = 6.4%
The investor would prefer the municipal bond because the taxable-equivalent yield is greater than the yield on the corporate bond: 6.4% > 6.375%

hinsafdar

An investor gathered the following information on three zero-coupon bonds:

• 1-year, $600 par, zero-coupon bond valued at $571
• 2-year, $600 par, zero-coupon bond valued at $544
• 3-year, $10,600 par, zero-coupon bond valued at $8,901

Given the above information, how much should an investor pay for a $10,000 par, 3-year, 6%, annual-pay coupon bond?

A) $10,000.

B) $10,016.

C) Cannot be determined by the information provided.

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A coupon bond can be viewed simply as a portfolio of zero-coupon bonds. The value of the coupon bond should simply be the summation of the present values of the three zero-coupon bonds. Hence, the value of the 3-year annual-pay bond should be $10,016 (571 + 544 + 8,901).