Practice Questions $-$ Bond Valuations

$7-1$ BOND VALUATION Callaghan Motors' bonds have $10$ years remaining to maturity. Interest is paid annually, they have a $$1,000$ par value, the coupon interest rate is $8\%,$ and the yield to maturity is $9\%.$ What is the bond's current market price?

$7-2$ YIELD TO MATURITY AND FUTURE PRICE A bond has a $$1,000$ par value, $10$ years to maturity, and a $7\%$ annual coupon and sells for $$985.$

a$.$ What is its yield to maturity $($YTM$)?$

b$.$ Assume that the yield to maturity remains constant for the next $3$ years. What will the price be $3$ years from today?

$7-3$ BOND VALUATION Nungesser Corporation's outstanding bonds have a $$1,000$ par value, a $9\%$ semiannual coupon, $8$ years to maturity, and an $8\mathrm{.}5\%$ YTM$.$ What is the bond's price?

$7-4$ YIELD TO MATURTY A firm's bonds have a maturity of $10$ years with a $$1,000$ face value, have an $8\%$ semiannual coupon, are callable in $5$ years at $$1,050,$ and currently sell at a price of $$1,100.$ What are their nominal yield to maturity and their nominal yield to call? What return should investors expect to earn on these bonds?

$7-5$ BOND VALUATION An investor has two bonds in his portfolio that have a face value of $$1,000$ and pay a $10\%$ annual coupon. Bond $L$ matures in $15$ years, while Bond $S$ matures in $1$ year.

a$.$ What will the value of each bond be if the going interest rate is $5\%,8\%,$ and $12\%?$ Assume that only one more interest payment is to be made on Bond $S$ at its maturity and that $15$ more payments are to be made on Bond L$.$

b$.$ Why does the longer$-$term bond's price vary more than the price of the shorter$-$term bond when interest rates change?

$7-8$ YIELD TO CALL Six years ago the Singleton Company issued $20-$year bonds with a $14\%$ annual coupon rate at their $$1,000$ par value. The bonds had a $9\%$ call premium, with $5$ years of call protection. Today Singleton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Explain why the investor should or should not be happy that Singleton called them.

$7-9$ YIELD TO MATURTY Heymann Company bonds have $4$ years left to maturity. Interest is paid annually, and the bonds have a $$1,000$ par value and a coupon rate of $9\%.$

a$.$ What is the yield to maturity at a current market price of $(1)$ $$829$ and $(2)$ $$1,104?$

b$.$ Would you pay $$829$ for each bond if you thought that a "fair" market interest rate for such bonds was $12\%-$that is$,$ if $r_d=12\%?$ Explain your answer.