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Six years ago the Templeton Company issued 17 -year bonds with a 15% annual coupon rate at their $1,000 par value. The bonds had a 9% cail premium, with 5 years of call protection. Today Templeton 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. Round your answer to two decimal places. % Why should or should not the investor be happy that Templeton called them? I. Investors should not be happy. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates. II. Investors should be happy. Since the bonds have been called, interest rates must have risen sufficiently such that the rre is greater than the YTM. If investors wish to reimvest their interest receipts, they can now do so at higher interest rates. IIt. Investors should be happy. Since the bonds have been called, investors will receive a call premium and can deciare a capital gain on their tax returns. IV. Investors should be happy. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk. 7. Problem 7.07 (Interest Rate Sensitivity) An investor purchased the following five bonds. Each bond had a par value of $1,000 and a 9% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 7%. What is the percentage change in price for each bond after the decline in interest rates? Fill in the following table. Enter all amounts as positive numbers. Do not round intermediate calculations. Round your monetary answers to the nearest cent and percentage answers to two decimal places. Continue without saving 3. Problem 7.03 (Bond Valuation) Nesmith Corperation's outstanding bonds have a $1,000 par value, a 6% semiannual coupon, 12 years to maturity, and an 8% YTM. What is the bond's price? Round your answer to the nearest cent. A firm's bonds have a maturity of 14 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 7 years at $1,235,35, and currently sell at a price of $1,405,42. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places. rTM: VTe: What return should investors expect to earn on these bonds? 1. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YM. II. Investors would not expect the bonds to be called and to earn the rTM because the YTM is greater than the rTC. III. Investors would not expect the bonds to be called and to earn the rTM because the rTM is less than the rTC. TV. Investors would expect the bonds to be called and to earn the rTC because the YTC is less than the YTM: Harrimon Industries bonds have 6 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 10%. a. What is the vield to maturity at a current market price of 1. \$824? Round your answer to two decimal places. 2. \$1.150? Round your answer to two decimal places. b. Would you pay $824 for each bond if you thought that a "fair" market interest rate for such bonds was 14%= that is, if r e =14% ? 1. You would not buy the bond as long as the vield to maturity at this price is greater than your required rate of return. 11. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond. III. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return. IV. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return. v, You would buy the bond as long as the yeld to maturity at this price equals your required rate of return. An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.1\%. Bond C pays a 12.5% annual coupon, whille Bond Z is a zero coupon bond. a. Assuming that the yield to maturity of each bond remains at 8.1% over the next 4 years, calculate the price of the bonds at each of the following years to maturity. Round your answers to the nearest cent. b. Select the correct graph based on the time path of prices for each bond. A 10. Problem 7.10 (Current Yield, Capital Gains Yield, and Yield to Maturity) Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $908.30. The capital gains yield last year was 9.17%. a. What is the yleld to maturity? Do not round intermediate calculations. Round your answer to two decimal places. % b. For the coming year, what are the expected current and capital gains yields? (Hint: Refer to Footnote 6 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answers to two decimal places. Expected current yield: % Expected capital gains yield: \% c. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ? I. As rates change they will cause the end-of-year price to change and thus the realized capital gains yieid to change. As a result, the realized return to investors will differ from the rTM. II. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors will differ from the YTM. III. As long as promised coupon payments are made, the current yield will not change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the rTM. IV. As long as promised coupon payments are made, the current yilid will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM. V. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will not cause the price to change and as a result, the realized return to investors should equal the YmM. 2. Problem 7.02 (Yield to Maturity and Future Price) A bond has a $1,000 par value, 20 years to maturity, and a 5% annual coupon and sells for $860. a. What is its vield to maturity (YTM)? Round your answer to two decimal places. % b. Assume that the yield to maturity remains constant for the next four years. What will the price be 4 years from today? Do not round intermediate calculations. Round your answer to the nearest cent. The correct sketch is Madsen Motors's bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate the yield to maturity is 12%. What is the bond's current market price? Round your answer to the nearest cent. in investor has two bonds in his portfolio that have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 17 years, while Bond S natures in 1 year. a. What will the value of the Bond L be if the poing interest rate is 5%,6%, and 10% ? Assume that only one more interest payment is to be made on Bond S at its maturity and that 17 more payments are to be made on Bond L. Round your answers to the nearest cent. b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? 1. Long-term bonds have lower reimvestment rate risk than do short-term bonds. II. The change in price due to a change in the required rate of return increases as a bond's matunity decreases. IIt. Long-term bonds have greater interest rate risk than do short-term bonds. IV. The change in price due to a change in the required rate of return decreases as a bond's maturity increases. V. Long-term bonds have lower interest rate risk than do short-term bonds