In: Finance
1.
7-3: Bond Valuation
Problem Walk-Through
Bond valuation
Bond X is noncallable and has 20 years...
1.
7-3: Bond Valuation
Problem Walk-Through
Bond valuation
Bond X is noncallable and has 20 years to maturity, a 8% annual
coupon, and a $1,000 par value. Your required return on Bond X is
10%; and if you buy it, you plan to hold it for 5 years. You (and
the market) have expectations that in 5, years the yield to
maturity on a 15-year bond with similar risk will be 12%. How much
should you be willing to pay for Bond X today? (Hint: You will need
to know how much the bond will be worth at the end of 5 years.)
Round your answer to the nearest cent.
$
2.
7-4: Bond Yields
Yield to maturity and yield to call
Kaufman Enterprises has bonds outstanding with a $1,000 face
value and 10 years left until maturity. They have an 10% annual
coupon payment, and their current price is $1,170. The bonds may be
called in 5 years at 109% of face value (Call price = $1,090).
- What is the yield to maturity? Round your answer to two decimal
places.
%
- What is the yield to call if they are called in 5 years? Round
your answer to two decimal places.
%
- Which yield might investors expect to earn on these bonds?
Why?
- Investors would expect the bonds to be called and to earn the
YTC because the YTC is greater than the YTM.
- Investors would not expect the bonds to be called and to earn
the YTM because the YTM is greater than the YTC.
- Investors would not expect the bonds to be called and to earn
the YTM because the YTM is less than the YTC.
- Investors would expect the bonds to be called and to earn the
YTC because the YTC is less than the YTM.
- Investors would expect the bonds to be called and to earn the
YTC because the YTM is less than the YTC.
-Select-IIIIIIIVV
- The bond's indenture indicates that the call provision gives
the firm the right to call the bonds at the end of each year
beginning in Year 5. In Year 5, the bonds may be called at 109% of
face value; but in each of the next 4 years, the call percentage
will decline by 1%. Thus, in Year 6, they may be called at 108% of
face value; in Year 7, they may be called at 107% of face value;
and so forth. If the yield curve is horizontal and interest rates
remain at their current level, when is the latest that investors
might expect the firm to call the bonds?
In Year -Select-