FIN CHAPTER 7 07 SOL complete

CHAPTER 7

7-1

BOND VALUATION        Callaghan Motors’ bonds have 10 years remaining to maturity.  Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8 percent.  The bonds have a yield to maturity of 9 percent.  

WHAT IS THE CURRENT MARKET PRICE OF THESE BONDS?
7-2

YIELD TO MATURITY AND CALL        Thatcher Corporation’s bonds will mature in 10 years.  The bonds have a face value of $1,000 and an 8 percent coupon rate, paid semiannually.  The price of the bonds is $1,100.  The bonds are callable in 5 years at a call price of $1,050.  What is the yield to maturity?  What is the yield to call?

7-3
BOND VALUATION        Nungesser Corporation has issued bonds that have a 9 percent coupon rate, payable semiannually.  The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5 percent.  What is the price of the bonds?

7-4
CURRENT YIELD AND YIELD TO MATURITY        A bond that matures in 10 years sells for $985.  The bond has a face value of $1,000 and a 7 percent annual coupon.
        a.    What is the bond’s current yield?
        b.    What is the bond’s yield to maturity (YTM)?
        c.    Assume that the yield to maturity remains constant for the next 3 years.  What will be the price of the bond 3 years from today?

7-5
BOND VALUATION        The Garraty Company has two bond issues outstanding.  Both bonds pay $100 annual interest plus $1,000 at maturity.  Bond L has a maturity of 15 years, and Bond S a maturity of 1 year.
        a.    What will be the value of each of these bonds when the going rate of interest is (1) 5 percent, (2) 8 percent, and (3) 12 percent?  Assume that there is only one more interest payment to be made on Bond S.
        b.    Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1-year)?

7-6
YIELD TO MATURITY        The Heymann Company’s bonds have 4 years remaining to maturity.  Interest is paid annually; the bonds have a $1,000 par value; and the coupon interest rate is 9 percent.
        a.    What is the yield to maturity at a current market price of (1) $829 or (2) $1,104?
        b.    Would you pay $829 for one of these bonds if you thought that the appropriate rate of interest was 12 percent—that is, if  ?  Explain your answer.

7-7
YIELD TO CALL        Six years ago, The Singleton Company sold a 20-year bond issue with a 14 percent annual coupon rate and a 9 percent call premium.  Today, Singleton called the bonds.  The bonds originally were sold at their face value of $1,000.  Compute the realized rate of return for investors who purchased the bonds when they were issued and who surrender them today in exchange for the call price.

7-8
BOND YIELDS        A 10-year, 12 percent semiannual coupon bond, with a par value of $1,000, may be called in 4 years at a call price of $1,060.  The bond sells for $1,100.  (Assume that the bond has just been issued.)

        a.    What is the bond’s yield to maturity?
        b.    What is the bond’s current yield?
        c.    What is the bond’s capital gain or loss yield?
        d.    What is the bond’s yield to call?

7-9
YIELD TO MATURITY        You just purchased a bond that matures in 5 years.  The bond has a face value of $1,000, an 8 percent annual coupon, and has a current yield of 8.21 percent.  What is the bond’s yield to maturity (YTM)?

7-10
CURRENT YIELD        A bond that matures in 7 years sells for $1,020.  The bond has a face value of $1,000 and a yield to maturity of 10.5883 percent.  The bond pays coupons semiannually.  What is the bond’s current yield?
            

7-11
NOMINAL INTEREST RATE        Lloyd Corporation’s 14 percent coupon rate, semiannual payment, $1,000 par value bonds, which mature in 30 years, are callable 5 years from now at a price of $1,050.  The bonds sell at a price of $1,353.54, and the yield curve is flat.  Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of Lloyd’s nominal interest rate on new bonds?

7-12
YIELD TO MATURITY AND YIELD TO CALL        Kaufman Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity.  The bonds have an 11 percent annual coupon payment.  The current price of these bonds is $1,175.  The bonds may be called in 5 years at 109 percent of face value (Call price = $1,090).

        a.    What is the yield to maturity of these bonds?
        b.    What is the yield to call for these bonds, if called in 5 years?
        c.    Which yield might investors expect to earn on these bonds, and why?
        d.    Further inspection of Kaufman Enterprises’ bond indenture reveals that the call provision on Kaufman’s bonds allows the firm the option to call the bonds at the end of each year beginning in Year 5.  Recall that in Year 5, the bonds may be called at 109 percent of face value.  For each of the next 4 years, the bonds may be called, but each year the call percentage will decline by 1 percent.  Hence, in Year 6 the bonds may be called at 108 percent of face value, in Year 7 the bonds may be called at 107 percent of face value, etc.  If interest rates remain the same, when is the latest that investors might expect the firm to call the bonds?

7-13
BOND VALUATION        A 20-year corporate bond has a par value of $1,000 and a 9 percent annual coupon rate.  Assume that your required rate of return is 10 percent and that you plan to hold on to this bond for 5 years.  You, and the market, have expectations that in 5 years the yield to maturity for this bond (or another bond with similar risk and maturity) will be 8.5 percent.  How much are you willing to pay for this bond today?  [Hint:  You will need to know how much you can sell the bond for at the end of 5 years.]

7-14
BOND VALUATION        You have just purchased a 10-year, $1,000 par value bond.  The coupon rate on this bond is 9 percent and interest is paid semiannually.  If you require an “effective” annual interest rate of 8.16 percent, then how much should you have paid for this bond?

7-15
CURRENT YIELD AND YIELD TO MATURITY        Hooper Printing Inc. has bonds outstanding with 9 years left to maturity.  The bonds have an 8 percent annual coupon rate and, were issued last year at par value of $1,000, but due to changes in interest rates, each bond’s value has fallen to $901.40.  The capital gains yield earned by investors over the last year was—9.86 percent.

        a.    What is the expected current yield for the next year?
        b.    What is the yield to maturity?
        c.    What is the expected capital gains yield for the next year if interest rates do not change?