1. An online retailer has bonds outstanding with a coupon rate of 8% and they will mature in 10 years. Investors who have purchased this bond are requiring a 17.7% rate of return, higher than any Treasury bond or Government bond. Calculate the current value (or market price) of the bond. Show your work and explain why the value of the bond makes sense. Is this a premium or discount bond?
2. Calculate the value of the bond with a zero-coupon rate but a 7% rate of return. Show your work and explain why this answer is different.
3. You own several bonds and as an astute investor, you keep track of your interest payments (also known as coupon payments or cash flows). Annually, you receive a fixed total of interest payments of $2,000 per year from these bonds for the next 5 years and your required rate of return is 7.5%. What is the current value of your bond investment? Show your work and explain your answer.
4. An auto manufacturer has outstanding 10-year bonds with a 6% coupon rate. Assuming investors require a yield to maturity (or required rate of return) of 9%, what is the current value of the bond? Show your work. Is this a premium or discount bond? How will the value of the bond change if investors increase their required rate of return to 11%?
5. A smartphone manufacturer has outstanding bonds with an 8% coupon rate that mature in 7 years. It is a very competitive market and investors are requiring a 6% rate of return. Calculate the value of the bond and show your work. Is this a premium or discount bond?
6. A municipal bond that has been issued for a high-growth California community matures in 5 years and will pay an annual coupon rate of 6% semi-annually. If the yield to maturity is 4.5% what is the value of the bond? Is this a premium or discount bond?