EXCEL ASSIGNMENT 4.3

MARCH 2021 | MGMT 332 | College of Business | worldwide.erau.edu

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MGMT 332 Corporate Finance I

Module 4: Interest Rates and Bond Valuation

Problem Set 4 – Interest Rates and Bond Valuation

1. What is the annual yield of a 9-year, 6% semi-annual coupon-paying bond priced today at $621? Par is $1,000.

2. What is the annual yield of a 5-year, 6% annual coupon-paying bond priced today at $989? Par is $1,000.

3. Show the cash flows and prices for the following four bonds, each with a par value of $1,000 and paying interest semi-annually:

# Coupon Rate Years to Maturity Market Yield

A 2.8% 8 4.4 B 3.8% 7 4.8 C 4.8% 9 5.6 D 0.0% 9 5.3

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

4. Consider a semi-annual bond with an annual coupon = 3.66%, maturity = 5 years, par value = $1,000, and a market price today = $599:

a. What is its yield to maturity (YTM)? b. Suppose the bond can be called at $750 at the end of year 4, what is its

yield to call?

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5. You have two bonds with the following characteristics:

Characteristics Bond A Bond B

Coupon 5.0% 5.2%

Years to Maturity 7 7 Par Value $1,000 $1,000

Price $788.00 $811.00

a. What are the bond durations? b. If rates rise to 5.75%, what are the new prices for each bond?