Question
2.1 (4 points) How does the equation for valuing a bond change if semiannual payments are made? Find the value of a 10-year, semiannual payment,
2.1 (4 points) How does the equation for valuing a bond change if semiannual payments
are made? Find the value of a 10-year, semiannual payment, 10 percent coupon bond
if nominal rd = 13%.
2.2 Suppose a 10-year, 10 percent, semiannual coupon bond with a par value of R1 000
is currently selling for R1 135.90, producing a nominal yield to maturity of 8 percent.
However, the bond can be called after 5 years for a price of R1 050.
i) (3 points) What is the bond's nominal yield to call?
ii) (2 points) If you bought this bond, do you think you would be more likely to earn the
YTM or the YTC? Why?
2.3 You have been provided with the following options.
a. A 10-year, R1000 face value, 10 percent coupon bond with semiannual interest
payments.
b. A 10-year, R1000 face value, 10 percent coupon bond with annual interest
payments.
c. A 10-year, R1000 face value, zero coupon bond.
d. A 10-year R100 annuity.
(3 points) Determine which one poses the highest price risk.
2.4 (4 points) Which of these five statement is the most correct:
a. Other things held constant, a callable bond would have a lower required rate of
return than a noncallable bond.
b. Other things held constant, a corporation would rather issue noncallable bonds than
callable bonds.
c. Reinvestment rate risk is worse from a typical investor's standpoint than interest
rate risk.
d. If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave
investors a 10 percent rate of return, and if interest rates then dropped to the point
where rd = YTM = 5%, we could be sure that the bond would sell at a premium over
its R1 000 par value.
4
e. If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a discount below its R1 000 par value. 2.5 (6 points) Marie Snell recently inherited some bonds (face value R100 000) from her father, and soon thereafter she became engaged to Sam Spade, a University of Florida marketing graduate. Sam wants Marie to cash in the bonds so the two of them can use the money to "live like royalty" for two years in Monte Carlo. The 2 percent annual coupon bonds mature on January 1, 2024, and it is now January 1, 2004. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent. If Marie sells her bonds now and puts the proceeds into an account which pays 10 percent compounded annually, what would be the largest equal annual amounts she could withdraw for two years, beginning today? 2.6 (6 points) Recently, Midrand Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue to be put into effect. The issue has 10 years to maturity and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for 5 years. Then, interest payments will be resumed for the next 5 years. Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first 5 years will be paid. However, no interest will be paid on the deferred interest. If the required annual return is 20 percent, what should the bonds sell for in the market today?
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