7-1:
• The bonds of the Apple Corporation have 10 years remaining to maturity, with the interest on the bonds paid annually.
• The coupon interest rate is 8%, while the yield to maturity is 9%.
• Calculate the bond’s current market price.
7-2:
• The bonds issued by the Laptop Corporation have a $1,000 par value, 10 years to maturity, pay 7% coupons, and sell for $985 per bond.
a. Calculate the yield to maturity on the bonds.
b. Assume that the yield to maturity stays constant for the next 3 years. Calculate the price of bonds 3 years from today.
7-3:
• The bonds of the Nuts Corporation have 9% semi-annual coupons, 8 years to maturity, and an 8.5% YTM.
• Calculate the current price of these bonds.
7-4:
• The investor has bought two bonds with a face value of $1,000 and 10% annual coupons:
o Bond L matures in 15 years.
o Bond S matures in 1 year.
• Calculate the value of each bond, if the going interest rate is as follows:
a. 5%
b. 8%
c. 12%
7-5:
• The investor has two bonds in her portfolio: Bond C and Bond Z.
• Each bond matures in 4 years, has a face value of $1,000, and the yield to maturity of 9.6%.
• Bond C pays 10% annual coupons. Bond Z is a zero coupon bond.
• Assuming that the yield to maturity of each bond remains at 9.6% over next 4 years, calculate the price of these bonds at each of the following years to maturity:
Time Years to Maturity Price of Bond C Price of Bond Z
t = 0 n = 4
t = 1 n = 3
t = 2 n = 2
t = 3 n = 1
t = 4 n = 0
7-6:
• The bonds issued by the Heymann Corporation have 4 years left to maturity.
• The interest on the bonds is paid annually at the 9% coupon rate.
• Calculate the yield to maturity on the company bonds at the following current market prices:
a. $829
b. $1,104
7-7:
• Last year, Janna bought a $1,000 face value bond with an 11% annual coupon rate and 10 years to maturity.
• At the time of purchase, the bond had an expected yield to maturity of 9.79%.
• If Janna could sell the bond today for $1,060.49, calculate the rate of return she would have earned for the past year.
7-8:
• The Lifestyle Corporation has issued 3-year bond that pays coupons of 6.1%.
• The coupon payments are made semi-annually, and the market rate of interest is 5.8%.
• Calculate the market value of the bond.
7-9:
• The Lend Lease Corporation is planning to issue 10-year semi-annual bonds.
• The market rate for such bonds is 8.125%.
• The company needs to raise $1 million and is deciding between issuing 8% coupon bonds or zero coupon bonds.
a. Calculate the price of the 8% coupon bonds.
b. Determine the number of the coupon-paying bonds that will have to be issued by the company.
c. Calculate the price of zero coupon bonds.
d. Determine the number of the zero-coupon bonds that will have to be issued by the company.
7-10:
• The UAE Treasury has issued 25-year bonds that pay semi-annual coupons at 9.875%.
• The current market rate for the bonds with a similar risk profile is 11%.
a. Calculate the current market value of the bonds.
b. Calculate the price of the bond, if the rates in the market decrease to 9% from the original 11%.
c. Calculate the price of the bond, if the rates in the market increase to 12% from the original 11%.
d. Refer to your answers in part (b). How do interest rate changes affect premium bonds and discount bonds?
e. Suppose the bonds were to mature in 12 years. Show how the interest rate changes in part (b), where the YTM is 9%, affect the price of the bonds.
f. Now assume the bonds were to mature in 12 years. Show how the interest rate changes in part (c), where the YTM is 11%, affect the price of the bonds.