7-19 ....part f Chapter 7 Bonds and Their Valuation7-16 BOND VALUATION You are considering a 10-year, $1,000 par value bond. Its couponrate is 8%, and interest is paid semiannually. If you require an "effective" annual inter-est rate (not a nominal rate) of 7.1225%, how much should you be willing to pay forthe bond?7-17 BOND RETURNS Last year Janet purchased a $1.000 face value corporate bond with an 8%annual couporn rate and a 15-year maturity. At the time of the purchase, it had an expectedyield to maturity of 10.45%. If Janet sold the bond today for $820.17, what rate of returnwould she have eamed for the past year?7-18 YIELD TO MATURITY AND YIELD TO CALL Kempton Enterprises has bonds outstandingwith a $1,000 face value and 10 years left until maturity. They have an 11% annual coupornpayment, and their current price is $1,185. The bonds may be called in 5 years at 109% offace value (Call price $1,090).a. What is the yield to maturity?b. What is the yield to call if they are called in 5 years?c Which yield might investors expect to earn on these bonds? Why?d. The bond's indenture indicates that the call provision gives the firm the right to callthe bonds at the end of each year beginning in Year 5. In Year 5, the bonds may becalled at 109% of face value, but in each of the next 4 years, the call percentage willdecline by 1%a 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 horizontaland interest rates remain at their current level, when is the latest that investors mightexpect the firm to call the bonds?%3Dprehensive/Spreadsheet Problem7-19 BONDVALUATION Clifford Clark is a recent retiree who is interested in investing some ofhis savings in corporate bonds. His financial planner has suggested the following bonds:Bond A has a 7% annual coupon, matures in 12 years, and has a $1,000 face value.Bond B has a 9% annual coupon, matures in 12 years, and has a $1,000 face value.Bond C has an 11% annual ooupon, matures in 12 years, and has a $1,000 face value.Each bond has a yield to maturity of 9%.a Before calculating the prices of the bonds, indicate whether each bond is trading at apremium, at a discount, or at par.b. Calculate the price of each of the three bonds.c Calculate the current yield for each of the three bonds. (Hint: Refer to footnote 6 fcrthe definition of the current yield and to Table 7.1.)d. If the yield to maturity for each bond remains at 9%, what will be the price of eachbond 1 year from now? What is the expected capital gains yield for each bond? Whatis the expected total retum. for each bond?e Mr. Clark is considering another bond, Bornd D. It has an 8% semiannual ooupon anda $1,000 face value (ie., it pays a $40 coupon every 6 months). Bond D is scheduled tomature in 9 years and has a price of $1,150. It is also callable in 5 years at a çall priceof $1,040.1. What is the bond's nominal yield to maturity?2 What is the bond's nominal yield to call?3. If Mr. Clark were to purchase this bond, would he be more likely to receive theyield to maturity or yield to call? Explain your answer.f. Explain briefly the difference between price risk and reinvestment risk. Which of efollowing bords has the most price risk? Which has the most reinvestment risk?A1-year Eond with a 9% annual coupon• A5-year bond with a 9% annual coupon. A5-year bond with a zero coupon. A 10-year bond with a 9% annual couponA 10-year bond with a zero coupon

Question

7-19 ....part f Chapter 7 Bonds and Their Valuation7-16 BOND VALUATION You are considering a 10-year, $1,000 par value bond. Its couponrate is 8%, and interest is paid semiannually. If you require an &#34;effective&#34; annual inter-est rate (not a nominal rate) of 7.1225%, how much should you be willing to pay forthe bond?7-17 BOND RETURNS Last year Janet purchased a $1.000 face value corporate bond with an 8%annual couporn rate and a 15-year maturity. At the time of the purchase, it had an expectedyield to maturity of 10.45%. If Janet sold the bond today for $820.17, what rate of returnwould she have eamed for the past year?7-18 YIELD TO MATURITY AND YIELD TO CALL Kempton Enterprises has bonds outstandingwith a $1,000 face value and 10 years left until maturity. They have an 11% annual coupornpayment, and their current price is $1,185. The bonds may be called in 5 years at 109% offace value (Call price $1,090).a. What is the yield to maturity?b. What is the yield to call if they are called in 5 years?c Which yield might investors expect to earn on these bonds? Why?d. The bond's indenture indicates that the call provision gives the firm the right to callthe bonds at the end of each year beginning in Year 5. In Year 5, the bonds may becalled at 109% of face value, but in each of the next 4 years, the call percentage willdecline by 1%a 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 horizontaland interest rates remain at their current level, when is the latest that investors mightexpect the firm to call the bonds?%3Dprehensive/Spreadsheet Problem7-19 BONDVALUATION Clifford Clark is a recent retiree who is interested in investing some ofhis savings in corporate bonds. His financial planner has suggested the following bonds:Bond A has a 7% annual coupon, matures in 12 years, and has a $1,000 face value.Bond B has a 9% annual coupon, matures in 12 years, and has a $1,000 face value.Bond C has an 11% annual ooupon, matures in 12 years, and has a $1,000 face value.Each bond has a yield to maturity of 9%.a Before calculating the prices of the bonds, indicate whether each bond is trading at apremium, at a discount, or at par.b. Calculate the price of each of the three bonds.c Calculate the current yield for each of the three bonds. (Hint: Refer to footnote 6 fcrthe definition of the current yield and to Table 7.1.)d. If the yield to maturity for each bond remains at 9%, what will be the price of eachbond 1 year from now? What is the expected capital gains yield for each bond? Whatis the expected total retum. for each bond?e Mr. Clark is considering another bond, Bornd D. It has an 8% semiannual ooupon anda $1,000 face value (ie., it pays a $40 coupon every 6 months). Bond D is scheduled tomature in 9 years and has a price of $1,150. It is also callable in 5 years at a çall priceof $1,040.1. What is the bond's nominal yield to maturity?2 What is the bond's nominal yield to call?3. If Mr. Clark were to purchase this bond, would he be more likely to receive theyield to maturity or yield to call? Explain your answer.f. Explain briefly the difference between price risk and reinvestment risk. Which of efollowing bords has the most price risk? Which has the most reinvestment risk?A1-year Eond with a 9% annual coupon• A5-year bond with a 9% annual coupon. A5-year bond with a zero coupon. A 10-year bond with a 9% annual couponA 10-year bond with a zero coupon

Accepted Answer

Price risk refers to the possibility of a security's or an investment portfolio's value falling…