Question
1. You are considering buying a bond that matures in 10 years from today. The par value of the bond is $10,000 and the coupon
1. You are considering buying a bond that matures in 10 years from today. The par value of the bond is $10,000 and the coupon rate is 7%. If the current market interest rates are 5%, what is the bond price today if the coupon is paid annually?
2. A Zero Coupon bond has a par value of $1000 and matures in 20 years. Investors require a 10% annual return on these bonds. For what price should the bond sell? (Note: Zero coupon bonds do not pay interest)
3. Suppose there are two bonds you are considering:
| Bond A | Bond B |
Maturity (years) | 20 | 30 |
Coupon Rate (%) paid Semiannually | 12 | 8 |
Par Value | $1000 | $1000 |
a. If both bonds had a required rate of return of 10%, what would the bonds price be?
b. Explain what it means when a bond is selling at a discount, a premium, or at its face amount (par value). Based on results in part (a), would you consider both bonds to be selling at discount, premium or at par?
c. Re-calculate the prices of the bonds if the required returns falls to 9%?
6. An Investor is considering two bonds. One is a corporate bond yielding 12% and is currently selling at par. The marginal tax rate is 28%. The other is a municipal bond with a coupon rate of 9.50%. Which should the investor choose?
15. A 15 year $5000 par value bond has a 12% semiannual coupon and a nominal yield to maturity of 8.5%. What is the price of the bond?
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