Corporate Finance Ch.8 Problems

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Chapter8: Interest Rates and Bond Valuation

Questions and Problems
1. Valuing Bonds What is the price of a 10-year, zero coupon bond paying $1,000 at maturity if the YTM is: BASIC (Questions 1– 12) a. 5 percent? b. 10 percent? c. 15 percent? 2. Valuing Bonds Microhard has issued a bond with the following characteristics: Par: $1,000 Time to maturity: 25 years Coupon rate: 7 percent Semiannual payments Calculate the price of this bond if the YTM is: a. 7 percent b. 9 percent c. 5 percent 3. Bond Yields Watters Umbrella Corp. issued 12-year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If these bonds currently sell for 105
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2012-03-21

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15. Interest Rate Risk The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a 14 percent bond outstanding. Both bonds have 8 years to maturity, make semiannual payments, and have a YTM of 10 percent. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? What if interest rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower coupon bonds? 16. Bond Yields Hacker Software has 7.4 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 96 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield? 17. Bond Yields Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 10 percent coupon bonds on the market that sell for $1,063, make semiannual payments, and mature in 20 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? 18. Accrued Interest You purchase a bond with an invoice price of $1,090. The bond has a coupon rate of 8.4 percent, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond? 19. Accrued Interest You purchase a bond with a coupon rate of 7.2 percent and a clean price

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