Notes on Investment Test

1640 Words Mar 18th, 2015 7 Pages
Chapter 7 Test Review

Problem 7-1
Bond valuation
Callaghan Motors' bonds have 5 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 6.5%, and the yield to maturity is 11%. What is the bond's current market price? Round your answer to the nearest cent.

Annual Interest Payment = Par Value * Coupon Rate $1,000 * 6.5%= 65

Financial Calculator
N= 5
I/YR= 11%
PMT= -65
FV= -$1,000 Find PV?

Bond’s Current Market Price= 833.68

Problem7-2
Yield to maturity and future price
A bond has a $1,000 par value, 12 years to maturity, and a 9% annual coupon and sells for $1,110.
a. What is its yield to maturity (YTM)? Round your answer to two decimal places.
Par Value= $1,000
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Round your answer to the nearest cent.

Bond S: Change N = 1, PV = ? PV = $1,018.35

5) What will the value of the Bond L be if the going interest rate is 12%? Round your answer to the nearest cent. 12%: Bond L: From Bond S inputs, change N = 17 and I/YR = 12%, PV = ?, PV = $928.80

6) What will the value of the Bond S be if the going interest rate is 12%? Round your answer to the nearest cent.

Bond S: Change N = 1, PV =? PV = $991.07

B.
Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?

I. Long-term bonds have greater interest rate risk then do short-term bonds.

Problem 7-8
Yield to call
Seven years ago the Singleton Company issued 20-year bonds with a 11% annual coupon rate at their $1,000 par value. The bonds had a 6% call premium, with 5 years of call protection. Today Singleton called the bonds.
A. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places.

Par Value= $1,000 *6%= 60+1000= 1,060
Coupon Rate= 11% Bond Price= 1000
No of Years= 7

Semiannual Interest Payment= 1,000 * 11%= 110 Financial Calculator
N= 7
I/YR= ?
PMT= 110
FV= 1,060
PV=1000
YTM = 11.60%

B. Explain why the investor should or should not be happy that Singleton called them.

Since the bonds have been called, interest rates must have
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