Valuation and Characteristics of Bonds

Module 9 Critical Thinking Assignment

Valuation and Characteristics of Bonds

*Complete the problems in an Excel spreadsheet. Be sure to show your work to receive credit, no hard keys.

Problem 9.1: Bond Valuation

BBG bonds have an annual coupon rate of 8 percent and a par value of 1,000 SAR and will mature in 20 years. If you require a return of 7 percent, what price would you be willing to pay for the bond? What happens if you pay more for the bond? What happens if you pay less for the bond?

Problem 9.2: Yield to Maturity

Assume the market price of a 5-year bond for MMT, Inc. is 900 SAR, and it has a par value of 1,000 SAR. The bond has an annual interest rate of 6 percent that is paid semiannually. What is the yield to maturity of the bond?

Problem 9.3: Current Yield

Assume you have a bond with a semiannual interest payment of 35 SAR, a par value of 1,000 SAR, and a current market of 780 SAR. What is the current yield of the bond?

Problem 9.4: Bond Valuation w/Zero Coupon Payment

The LCC Corporation is planning on issuing bonds that pay no interest but can be converted into 1,000 SAR at maturity, 7 years from their purchase. To price these bonds competitively with other bonds of equal risk, it is determined that they should yield 6 percent, compounded annually. At what price should the LCC Corporation sell these bonds?

Problem 9:5: Bondholder’s Expected Rate of Return

SKA Co. bonds are selling in the market for 1,045 SAR. These 15-year bonds pay 7 percent interest annually on a 1,000 SAR par value. If they are purchased at the market price, what is the expected rate of return?