Andrew Jacobson Financial

Night Hawk Co. Issued 15 Year Bond

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iQILBESTBOMS AND PROBLEMS

Basic 1. Interpreting Bond Yields. Is the yield to maturity on a bond the same thing as

(Questions 1-14) ( J the required return? Is YTM the same thing as the coupon rate? Suppose today a

10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond now? The YTM?

2. interpreting Bond Yields. Suppose you buy a 7 percent coupon, 20-year bond today when it's first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? Why?

3. Bond Prices. Zevon, Inc., has 9 percent coupon bonds on the market that have I J 8 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 7 percent, what is the current bond price?

4. Bond Yields. The Timberlake-Jackson Wardrobe Co, has 8 percent coupon bonds . j on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $ 1,047.50, what is its YTM?

0 5. Coupon Rates. Merton Enterprises has bonds on the market making annual payments, with 16 years to maturity, and selling for $1,051, At this price, the bonds yield 6.8 percent. What must the coupon rate be on Merton's bonds? 6. Bond Prices. Brittany Co. issued 15-year bonds one year ago at a coupon rate of 8.50 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.90 percent, what is the current bond price?

7. Bond Yields. Night Hawk Co. issued 15-year bonds two years ago at a coupon rate of 8.4 percent. The bonds make semiannual payments. If these bonds currently sell for 96 percent of par value, what is the YTM?

8. Coupon Rates. Young Corporation has bonds on the market with 10.5 years to maturity, a YTM of 6.9 percent, and a current price of SI.070. The bonds make semiannual payments. What must the coupon rate be on the bonds?

9. Calculating Real Rates of Return. If Treasury bills are currently paying

8 percent and the inflation rate is 4.7 percent, what is the approximate real rate of interest? The exact real rate?

10. Inflation and Nominal Returns. Suppose the real rate is 3,2 percent and the inflation rate is 4.3 percent. What rale would you expect to see on a Treasury bill?

11. Nominal and Real Returns. An investment offers a 14 percent total return over the coming year. Bill Bernanke thinks the total real return on this investment will be only 9 percent. What docs Bill believe the inflation rate will be over the next year?

12. Nominal versus Real Returns. Say you own an asset that had a total return last year of 13 percent. If the inflation rate last year was 4. i percent, what was your real return?

13. Using Treasury Quotes. Locate the Treasury issue in Figure 6.3 maturing in June 2009. Is this a note or a bond? What is its coupon rate? What is its bid price? What was the previous day's asked price?

14. Using Treasury Quotes. Locate the Treasury bond in Figure 6.3 maturing in November 2027. 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?

15. Bond Price Movements. Bond X is a premium bond making annual payments. Intermediate The bond pays a 9 percent coupon, has a YTM of 7 percent, and has 13 years to (Questions 15-30) maturity. Bond Y is a discount bond making annual payments. This bond pays a

7 percent coupon, has a YTM of 9 percent, and also has 13 years to maturity. What are the prices of these bonds today? If interest rates remain unchanged, what do you expect the prices of these bonds to be in one year? In three years? In eight years? in 12 years'1 In 13 years? What's going on here? Illustrate your answers by graphing bond prices versus time to maturity.

16. Interest Rate Risk. Both Bond Bill and Bond Ted have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has 20 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Bill? Of Bond Ted? If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Bill be then? Of Bond Ted? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of longer-term bonds?

17. Interest Rate Risk. Bond J is a 4 percent coupon bond. Bond S is a 10 percent coupon bond. Both bonds have eight years to maturity, make semiannual payments, and have a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?

18. Bond Yields. PK Software has 8 percent coupon bonds on the market with

18 years to maturity. The bonds make semiannual payments and currently sell for 93 percent of par. What is the current yield on PK's bonds? The YTM? The effective annual yield?

19. Bond Yields. BDJ Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 7.5 percent coupon bonds on the market that sell for $1,062, 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?

20. Accrued Interest. You purchase a bond with an invoice price of $1.090. The bond has a coupon rate of 8.6 percent, semiannual coupons, and there are five months to the next coupon date. What is the clean price of the bond?

21. Accrued Interest. You purchase a bond with coupon rate of 7.5 percent, semiannual coupons, and a clean price of $865. If the next coupon payment is due in three months, what is the invoice price?

22. Using Bond Quotes. Suppose the following bond quote for IOU Corporation appears in the financial page of today's newspaper. Assume the bond has a face value of $l,000, and the current date is April 15, 2008. What is the yield to maturity of the bond? What is the current yield?

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