#1 Callaghan Motors’ bonds have 10 years remaining to …



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All calculations are on the attached excel sheet

#1 Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 8.5%, and the yield to maturity is 9.5%. What is the bond’s current market price?

$937.21

#2 A bond has a $1,000 par value, 10 years to maturity, and a 6% annual coupon and sell for $990. a. What is it yield to maturity (YTM)

6.14%

b. Assume that the yield to maturity remains constant for the next 2 years. What will the price be 2 years from today?

$991.55

#3 Nungesser Corporation’s outstanding bonds have a $1,000 par value, a 8% semiannual coupon, 7 years to maturity, and an 9% YTM. What is the bond’s price?

$943.83

#4 An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 14 years, while Bond S matures in 1 year. a. What will the value of each bond be if the going interest rate is 4%, 8%, and 11%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 14 more payments are to be made on Bond L.

b. Why does the longer-term bond’s price vary more than the price of the short-term bond when interest rates change?

Think about a bond that matures in one month. Its present value is influenced primarily by the maturity value, which will be received in only one month. Even if interest rates double, the price of the bond will still be close to $1,000. A 1-year bond’s value would fluctuate more than the one-month bond’s value because of the difference in the timing of receipts. However, its value would still be fairly close to $1,000 even if interest rates doubled. A long-term bond paying semiannual coupons, on the other hand, will be dominated by distant receipts, receipts that are multiplied by 1/(1 + rd/2)t, and if rd increases, these multipliers will decrease significantly. Another way to view this problem is from an opportunity point of view. A 1-month bond can be reinvested at the new rate very quickly, and hence the opportunity to invest at this new rate is not lost; however, the long-term bond locks in subnormal returns for a long period of time.

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