math Guruu 4

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FINE 332 Corporate Finance I

Module 4 Problem Set Interest Rates and Bond Valuation

1. What is the annual yield of a 9-year, 3.4% semi-annual coupon-paying bond priced today at $666? Par is $1,000.

2. What is the annual yield of a 15-year, 2.75% annual coupon-paying bond priced today at $785? Par is $1,000.

3. Show cash flows and prices for these semi-annual bonds, each with par value of $1,000:

# Coupon Rate Years to Maturity Market Yield

A 3.25% 11 4.25%

B 4.6% 12 4.0%

C 4.8% 12 4.35%

D 0.0% 8.5 4.25%

Which would you prefer to hold and why? (Answer in the box provided.)

4. Consider a semi-annual bond with an annual coupon = 4.2%, maturity = 12 years, par value = $1,000, and a market price today = $663:

a. What is its yield to maturity (YTM)? b. If it can be called at $750 at the end of year 5, what is its yield to call?

5. You have two bonds with the following characteristics:

Characteristics Bond A Bond B Coupon 4.5% 5.0%

Years to Maturity 10 8 Par Value $1,000 $1,000

Price $880.00 $911.00 a. What are the bond durations? b. If rates rise to 5.5%, what are the new prices for each bond?