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Bonds Questions

This document contains 11 questions related to bond valuation. Question 1 asks about the expected price of two bonds with different coupon rates and yields over time if interest rates remain unchanged. Question 2 asks about the percentage price changes of two bonds if interest rates rise or fall. Question 3 asks about the price changes and interest rate risk of lower coupon bonds. The remaining questions ask about bond yields, zero coupon bonds, and the price changes of bonds with different maturities if interest rates change.

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Hassan Awais
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471 views2 pages

Bonds Questions

This document contains 11 questions related to bond valuation. Question 1 asks about the expected price of two bonds with different coupon rates and yields over time if interest rates remain unchanged. Question 2 asks about the percentage price changes of two bonds if interest rates rise or fall. Question 3 asks about the price changes and interest rate risk of lower coupon bonds. The remaining questions ask about bond yields, zero coupon bonds, and the price changes of bonds with different maturities if interest rates change.

Uploaded by

Hassan Awais
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Bonds Questions

Questions 1

Bond X is a premium bond making annual payments. The bond pays a 9 percent coupon, has a YTM of 7 percent,
and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond pays a 7 percent
coupon, has a YTM of 9 percent, and also has 13 years to maturity. If interest rates remain unchanged, what do you
expect the price of these bonds to be one year from now? In three years? In eight years? In 12 years? In 13 years?
What’s going on here?

Question 2

Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced at par value.
Bond Sam has 2 years to maturity, whereas Bond Dave has 15 years to maturity. If interest rates suddenly rise by
2 percent, what is the percentage change in the price of Bond Sam? Of Bond Dave ?If rates were to suddenly fall by
2 percent instead, what would the percentage change in the price of Bond Sam be then? Of Bond Dave?
Question 3

Bond J is a 4 percent coupon bond. Bond K is a 12 percent coupon bond. Both bonds have eight years to maturity,
make semiannual payments, and have a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what is
the percentage price change of these bonds? What if rates suddenly fall by 2 percent instead? What does this
problem tell you about the interest rate risk of lower coupon bonds?
Question 4

Caribbean Reef Software has 8.4 percent coupon bonds on the market with nine years to maturity. The bonds make
semiannual payments and currently sell for 95.5 percent of par. What is the current yield on the bonds?if YTM is
9.14% then what is The effective annual yield?
Question 5

You purchase a bond with an invoice price of $1,090. The bond has a coupon rate of 8.6 percent, and there are five
months to the next semiannual coupon date. What is the clean price of the bond?
Question 6

You purchase a bond with a coupon rate of 7.5 percent and a clean price of $865. If the next semiannual coupon
payment is due in three months, what is the invoice price?
Question 7

a. What is the relationship between the price of a bond and its YTM?
b. Explain why some bonds sell at a premium over par value while other bonds sell
at a discount. What do you know about the relationship between the coupon rate
and the YTM for premium bonds? What about for discount bonds? For bonds
selling at par value?
c. What is the relationship between the current yield and YTM for premium
bonds? For discount bonds? For bonds selling at par value?

Question 8

Snowflake Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero
coupon bonds to raise the money. The required return on the bonds will be 8 percent.
a. What will these bonds sell for at issuance?
b. Using the IRS amortization rule, what interest deduction can Snowflake Corporation take on these bonds in the
first year? In the last year?
Question 9

Bond P is a premium bond with a 9 percent coupon. Bond D is a 5 percent coupon bond currently selling at a
discount. Both bonds make annual payments, have a YTM of 7 percent, and have five years to maturity. What is
the current yield for bond P? For bond D? If interest rates remain unchanged, what is the expected capital gains yield
over the next year for bond P? For bond D? Explain your answers and the interrelationships among the various types
of yields.
Question 10

The Mangold Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and
matures in 20 years. The bond makes no payments for the first six years, then pays $1,100 every six months over the
subsequent eight years, and finally pays $1,400 every six months over the last six years. Bond N also has a face
value of $20,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. If the required
return on both these bonds is 9 percent compounded semiannually, what is the current price of bond M? Of bond N?

Question 11
Red Frog Brewery has $1,000-par-value bonds outstanding with the following characteristics:
currently selling at par; 5 years until final maturity; and a 9 percent coupon rate
(with interest paid semiannually). Interestingly, Old Chicago Brewery has a very similar
bond issue outstanding. In fact, every bond feature is the same as for the Red Frog
bonds, except that Old Chicago’s bonds mature in exactly 15 years. Now, assume that
the market’s nominal annual required rate of return for both bond issues suddenly fell
from 9 percent to 8 percent.

a.Which brewery’s bonds would show the greatest price change? Why?
b. At the market’s new, lower required rate of return for these bonds, determine the per
bond price for each brewery’s bonds. Which bond’s price increased the most, and by
how much?

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