Bond Valuation Practice Problems 1. The $1,000 face value ABC bond has a coupon rate of 6%, with interest paid semi-annually, and matures in 5 years. If the bond is priced to yield 8%, what is the bond's value today? o FV = $1,000 o CF = $60/2 = $30 o N = 5 x 2 = 10 o i = 8%/2 = 4% o PV = $918.89 2. The $1,000 face value EFG bond has a coupon of 10% (paid semi-annually), matures in 4 years, and has current price of $1,140. What is the EFG bond's yield to maturity? o FV = $1,000 o CF = $100/2 = $50 o N = 4 x 2 = 8 o PV = $1,140 o i = 3% o yield-to-maturity = 3% x 2 = 6% 3. The HIJ bond has a current price of $800, a maturity value of $1,000, and matures in 5 years. If interest is paid semi-annually and the bond is priced to yield 8%, what is the bond's annual coupon rate? o PV = $800 o FV = $1,000 o N = 5 x 2 = 10 o i = 8% / 2 = 4% o CF = $15.34 o Coupon = $30.68 per year or 3.068% 4. The KLM bond has a 8% coupon rate (with interest paid semi-annually), a maturity value of $1,000, and matures in 5 years. If the bond is priced to yield 6%, what is the bond's current price? o CF = $40 o FV = $1,000 o N = 10 o i = 6%/2 = 3% o PV = $1,085 5. The NOP bond has an 8% coupon rate (semi-annual interest), a maturity value of $1,000, matures in 5 years, and a current price of $1,200. What is the NOP's yield-to-maturity? o CF = $40 o FV = $1,000 o N = 5 x 2 = 10 o PV = $1,200 o i = 1.797% o yield-to-maturity = 1.797% x 2 = 3.594% 3.11. The WSJ lists a bond as Acme 9s13 and the price as 89.875. If your required rate of return is 10%, would you buy one of these bonds in 2001? B = $931.00, yes. 3.12. Bakersfield Company 8.5s26 bonds pay interest semiannually, and they are quoted in the WSJ as 90. If your required rate of return is 10%, would you buy these bonds in 2011? B = $884.71, no. 3.13. You are thinking of buying IBM 6.25s20 bonds, priced at 92. The bonds pay interest semiannually. If your required rate of return is 8%, would you buy these bonds in 2011? B = $889.23, no. 3.14. Napier Company has zero-coupon bonds maturing in 2018. The yield to maturity for these bonds is 9%. Find the price of one of these bonds in 2001. $231.07 3.15. Checking the Wall Street Journal in 2001, you find that the Babbitt Co. 6s21 bonds show the price as 68. The bonds pay interest semiannually. If your required rate of return for such bonds is 10%, would you buy Babbitt bonds? B = $656.81, no. 3.16. The investors require 8% return on Keitel Corporation 5s2024 bonds that pay interest semiannually. Find the price of one of these bonds in 2011. $760.26 3.17. Adapazari Company 7% coupon bonds pay interest semiannually. When you bought one of these bonds, it had 11 years to maturity, and the appropriate discount rate was 9%. After one year, the discount rate on such bonds is 8% because of the improved financial health of the company. If you sell the bond today, what would be your capital gain or loss? $69.89 gain 3.18. Zeller Co bonds are selling at $602.50 each because the bondholders' required rate of return is 15%. The bonds pay interest semiannually and they will mature after 10 years. Find the coupon rate of these bonds. 7.2% 3.19. Armstrong Company bonds have 7% coupon rate, they pay interest semiannually, and they will mature after 12 years. In the bond market, these bonds are selling at $900 each. If your required rate of return is 8%, would you buy one of these bonds? B = $923.77, yes. 3.20. Suppose you want to buy a PP&L bond with coupon 18.75% that matures in 5 years, and pays interest semiannually. If the face value of this bond is $1,000, and your required rate of return is 12%, how much should you pay for this bond? $1,248.40 3.21. Athens Corporation bonds pay interest semiannually. The bonds have a coupon of 11% and they will mature after 11 years. If the investors' required rate of is return of 14%, find the market value of a $1000 bond. $834.08 3.22. Allen Corp bonds have a face value of $1,000 and coupon rate of 13.5%. They make semiannual interest payments. How much should you pay for an Allen bond if your required rate of return is 8.5% and the bond will mature after 8 years? $1,286 3.23. IBM bonds have a coupon rate of 8%, pay interest semiannually, and will mature in 8 years. What is the price of a $1,000 IBM bond if the investors have a required rate of return of 7%? $1060.47 3.24. Edwards Corp 9s2018 bonds pay interest semiannually. If your required rate of return for such a bond is 11% annually, how much should you pay for a $1,000 bond in 2001? $847.63 3.25. Butler Corp 6s06 bonds pay interest semiannually and will mature on October 8, 2006. If your required rate of return is 9% per year, how much should you pay for a $1,000 bond on April 9, 2001? $872.06 3.26. Find the price of a $1000 Forster Corp bond which is going to mature in six and a half years. It pays interest semiannually; has coupon of 11%; and the bondholders have a required rate of return of 12% annually on their investment. $955.74 3.27. Aquarius Waterworks bonds have 9 years until maturity and they pay interest annually. The investors require a return of 14% on these bonds and are willing to buy them at 80% of their face value. Find the coupon rate on these bonds. 9.96% 3.28. A perpetual bond has face value $1,000, and coupon 8%. You bought this bond when the interest rates were 10%, and sold it when the interest rates were 12%. Find your capital gain or loss in dollars. Loss $133.33 3.29. Meitner Corp issued zero coupon bonds in 1980 that mature in 2010. If your required rate of return is 13% on such bonds, how much would you pay for one in 1997? $204.16 3.30. Doenitz Corp issued $1000 face value, perpetual bonds in 1980 with a coupon of 8%. Find the price of one of these bonds in 1999 when the interest rate is 7%. $1142.86 3.31. The Northern Airlines 5s03 bonds will mature on January 15, 2003. Due to financial difficulties of the firm, the bondholders have a required rate of return of 25% on their investment. Find the price of one of these bonds on July 15, 1999. $550.77 3.32. Baines Corp bonds have 6 years until maturity. The bonds have a 9% coupon, and they sell at $1075 apiece. Calculate their yield to maturity. 7.56% 3.33. Compton Company bonds pay interest semiannually, and they will mature after 10 years. Their current yield is 8%, whereas their yield to maturity is 10%. Find the coupon rate and the market value of these bonds. Hint: use (3.1) and (3.4). 6.012%, $751.51 3.34. Port Elizabeth Corporation bondholders require a return of 12% on their investment. The bonds carry a coupon of 7% and they will mature after 7.5 years. Find the market price of one of these bonds. $781.47 3.35. Johannesburg Corporation issued zero-coupon bonds in 1976, which will mature in 2006. The initial price of the bonds gave 9.5% return to the investors. Find the issue price of these bonds. 65.70 3.36. A bond pays interest semiannually and it will mature after six years. The required rate of return by the bondholders is 14% per year, and the face amount of the bond is $1000. If the market price of the bond is $920.60, find its coupon rate. 12% 3.37. Bennett Company bonds will mature after 5 years and they are selling at 80.175% of their face value. The bonds pay interest annually. The required rate of return by the bondholders is 12%. Find the coupon rate of these bonds. 6.5% 3.38. Cleveland Company bonds have current yield 8% and yield to maturity 9%. They are selling at $725.50 per $1000 bond. Find the time to maturity for these bonds. 14 years 3.39. You are planning to buy Ford 6s10 bonds in 2001 with the price at 79. The bonds pay interest semiannually. If your required rate of return is 11%, would you buy these bonds? B = $732.91, no. 3.40. Checking The Wall Street Journal, you find that the Burns Co. 7s21 bonds are quoted as 66. The bonds pay interest semiannually. If in 2001 your required rate of return for such bonds is 12%, would you buy Burns bonds? B = $623.84, no.