7.1

Callaghan Motors' bonds have 7 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 12%, and the yield to maturity is 5%. What is the bond's current market price? Round your answer to the nearest cent.

7.2

A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon and sells for $985.

1. What is its yield to maturity (YTM)? Round your answer to two decimal places. %
2. Assume that the yield to maturity remains constant for the next 2 years. What will the price be 2 years from today? Round your answer to the nearest cent. $

7.8

Ten years ago the Singleton Company issued 30-year bonds with a 9% 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.

1. 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. %
2. Explain why the investor should or should not be happy that Singleton called them.
   1. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates.
   2. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.
   3. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns.
   4. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk.
   5. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.