a. Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000 at a yield to maturity of 8.6%. Now, with 7 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 15%. What is the price of the bond now? (Assume semiannual coupon payments.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Bond price.

b. Suppose that investors believe that Castles can make good on the promised coupon payments but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 80% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Yield to maturity

%

A bonds credit rating provides a guide to its risk. Suppose that long-term bonds rated Aa currently offer yields to maturity of 9.4%. A-rated bonds sell at yields of 9.7%. Suppose that a 10-year bond with a coupon rate of 9.5% is downgraded by Moodys from an Aa to A rating.

a. Is the bond likely to sell above or below par value before the downgrade?

multiple choice 1

• Above par value

• Below par value

b. Is the bond likely to sell above or below par value after the downgrade?

multiple choice 2

• Above par value

• Below par value

One bond has a coupon rate of 6.2%, another a coupon rate of 8.1%. Both bonds pay interest annually, have 9-year maturities, and sell at a yield to maturity of 7.0%.

a. If their yields to maturity next year are still 7.0%, what is the rate of return on each bond? (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)

	Bond 1		Bond 2
Rate of return		%		%

b. Does the higher-coupon bond give a higher rate of return over this period?

multiple choice

• Yes

• No