hinsafdar

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

• 1-year, $800 par, zero-coupon bond valued at $762
• 2-year, $10,800 par, zero-coupon bond valued at $9,796

Given the above information, how much should an investor pay for a $10,000 par, 2-year, 8%, annual-pay coupon bond?

A) $9,796.

B) $10,558.

C) $10,000.

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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 two zero-coupon bonds. Hence, the value of the 2-year annual-pay bond should be $10,558 ($762 + $9,796).

hinsafdar

A coupon bond that pays interest 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 12%?

A) $1,075.82.

B) $927.90.

C) $1,077.22

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FV = 1,000
N = 5
I = 10
PMT = 120
PV = ?
PV = 1,075.82.

hinsafdar

Value a semi-annual, 8% coupon bond with a $1,000 face value if similar bonds are now yielding 10%? The bond has 10 years to maturity.

A) $875.38.

B) $1,373.87.

C) $1,000.00.

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Using the financial calculator: N = 10 × 2 = 20; PMT = $80/2 = $40; I/Y = 10/2 = 5%; FV = $1,000; Compute the bond’s value PV = $875.38.

hinsafdar

If an investor purchases a 8 1/2s 2001 Feb. $10,000 par Treasury Note at 105:16 and holds it for exactly one year, what is the rate of return if the selling price is 105:16?

A) 8.50%.

B) 8.00%.

C) 8.06%.

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Purchase Price = [(105 + 16/32)/100] x 10,000 = $10,550.00 Selling price = [(105 + 16/32)/100] x 10,000 = $10,550.00 Interest = 8 1/2% of 10,000 = $850.00
Return = (Pend - Pbeg + Interest)/Pbeg = (10,550.00 - 10,550.00 + 850.00)/10,550.00 = 8.06%

hinsafdar

What is the present value of a 7% semiannual-pay bond with a $1,000 face value and 20 years to maturity if similar bonds are now yielding 8.25%?

A) $879.52.

B) $1,000.00.

C) $878.56.

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N = 20 × 2 = 40; I/Y = 8.25/2 = 4.125; PMT = 70/2 = 35; and FV = 1,000.
Compute PV = 878.56.

hinsafdar

What value would an investor place on a 20-year, 10% annual coupon bond, if the investor required an 11% rate of return?

A) $879.

B) $1,035

C) $920.

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N = 20, I/Y = 11, PMT = 100, FV = 1,000, CPT PV

hinsafdar

An investor buys a 25-year, 10% annual pay bond for $900 and will sell the bond in 5 years when he estimates its yield will be 9%. The price for which the investor expects to sell this bond is closest to:

A) $964.

B) $1,122.

C) $1,091.

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This is a present value problem 5 years in the future.
N = 20, PMT = 100, FV = 1000, I/Y = 9
CPT PV = -1,091.29
The $900 purchase price is not relevant for this problem.

hinsafdar

Assume a city issues a $5 million bond to build a hockey rink. The bond pays 8% semiannual interest and will mature in 10 years. Current interest rates are 6%. What is the present value of this bond?

A) $5,000,000.

B) $5,743,874.

C) $3,363,478.

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Since current interest rates are lower than the coupon rate the bond will be issued at a premium. FV = $5,000,000; N = 20; I/Y = 3; PMT = (0.04)($5,000,000) = $200,000. Compute PV = $-5,743,874

hinsafdar

What is the present value of a three-year security that pays a fixed annual coupon of 6% using a discount rate of 7%?

A) 97.38.

B) 92.48.

C) 100.00.

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This value is computed as follows: Present Value = 6/1.07 + 6/1.072 + 106/1.073 = 97.38
The value 92.48 results if the coupon payment at maturity of the bond is neglected. The coupon rate and the discount rate are not equal so 100.00 cannot be the correct answer.

hinsafdar

An investor purchased a 6-year annual interest coupon bond one year ago. The coupon rate of interest was 10% and par value was $1,000. At the time she purchased the bond, the yield to maturity was 8%. The amount paid for this bond one year ago was:

A) $1,125.53.

B) $1,198.07.

C) $1,092.46.

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N = 6
PMT = (0.10)(1,000) = 100
I = 8
FV = 1,000
PV = ?
PV = 1,092.46