7-16

7-18

7-16 You are considering a 10-year, $1,000 par value bond. Its coupon rate is 9%, BOND VALUATION and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 8.16%, how much should you be willing to pay for the bond? 7-17 BOND RETURNS Last year Joan purchased a $1,000 face value corporate bond with an 11% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.79%. If Joan sold the bond today for $1,060.49, what rate of retum would she have earned for the past year? 7-18 YIELD TO MATURITY AND YIELD TO CALL Kaufman Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,175. The bonds may be called in 5 years at 109% of face value (Call price $1,090). a. What is the vield to maturity? b. What is the vield 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 call the bonds at the end of each year beginning in Year 5, In Year 5, the bonds may be called at 109% of face value; but in each of the next 4 years, the call percentage will decline by 1%. 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 horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds