Question

1. A bond with 10 years to maturity has a face value of $1,000. The bond can be called in four years for $1050. The bond pays an 6 percent semiannual coupon, and the bond has a 3.3 percent nominal yield to maturity.  What is the price of the bond today assuming that it will be called?

2.

A corporate bond that matures in 12 years pays a 9 percent annual coupon, has a face value of $1,000, and a current price of 980. The bond can first be called four years from now.  The call price is $1,050.  What is the bond’s yield to call?

a.         10.01%

b.         5.36%

c.         10.71%

d.         11.86%

e.         None of the above

3.

You just purchased a $1,000 par value, 9-year, 7 percent annual coupon bond that pays interest on a semiannual basis.  The bond sells for $920. What is the bond’s nominal yield to maturity?

a.         7.28%

b.         8.28%

c.         9.60%

d.         8.67%

e.         4.13%

f.          None of the above

Answer 1

1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

Bond Price =∑ [(6*1000/200)/(1 + 3.3/200)^k]     +   1000/(1 + 3.3/200)^10x2

k=1

Bond Price = 1228.39

2

K = Time to call

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTC)^k]     +   Call Price/(1 + YTC)^Time to call

k=1

K =4

980 =∑ [(9*1000/100)/(1 + YTC/100)^k]     +   1050/(1 + YTC/100)^4

k=1

YTC% = 10.71

3

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =9x2

920 =∑ [(7*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^9x2

k=1

YTM% = 8.28