Bond Practice Problems

FIN 3315
Byers

Problem 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?

FV = $1,000
CF = $60/2 = $30
N = 5 x 2 = 10
i = 8%/2 = 4%

PV = $918.89

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Problem 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?

FV = $1,000
CF = $100/2 = $50
N=4x2=8
PV = $1,140

i = 3%

yield-to-maturity = 3% x 2 = 6%

Problem 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?

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PV = $800
FV = $1,000
N = 5 x 2 = 10
i = 8% / 2 = 4%

CF = $15.34
Coupon = $30.68 per year or 3.068%

Problem 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?

CF = $40
FV = $1,000
N = 10
i = 6%/2 = 3%

PV = $1,085

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Problem 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?

CF = $40
FV = $1,000
N = 5 x 2 = 10
PV = $1,200

i = 1.797%
yield-to-maturity = 1.797% x 2 = 3.594%

Problem 6
XZYY, Inc. currently has an issue of bonds outstanding
that will mature in 31 years. The bonds have a face value
of $1,000 and a stated annual coupon rate of 20.0% with
annual coupon payments. The bond is currently selling
for $890. What is your expected quoted annual rate of
return if you buy the bonds and hold them until
maturity?

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 Input 31 -890 200 1000
N I PV PMT FV
Output 22.48

Problem 7
You are considering buying bonds in ACBB, Inc. The
bonds have a par value of $1,000 and mature in 37
years. The annual coupon rate is 10.0% and the coupon
payments are annual. If you believe that the appropriate
discount rate for the bonds is 13.0%, what is the value of
the bonds to you?

Input 37 13 100 1000

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Problem 8
A company has issued a $10,000 bond with zero coupon. It has 20
years remaining to its original 30-year maturity and investors in
the market are seeking a yield of 8%. The price of the bond today
is:
a. $2,145
b. $2,840
c. $6,667
d. none of the above

Input 20 8 0 10,000
N I PV PMT FV
Output -2,145.48

Problem 9
If a bond is selling at par value, the required return sought by
investors must be:

A. higher than the coupon rate

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 B

Problem 10
If two bonds are identical in risk, maturity date, and face value, but
one coupon rate is 10% and the other is 8%, with a market yield
requirement of 9% applicable to both bonds:
A. the 10% coupon bond would be selling at a premium and the 8%
coupon bond would be selling at a discount
B. the 10% coupon bond would be selling at a discount and the 8%
coupon bond would be selling at a premium
C. at the maturity date, both bonds would be selling at face value
D. a and c

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Problem 11
A zero-coupon bond with par value = $1,000 has a of
maturity = 13 years from now; discount rate = 8%
(assume semi-annual compounding). Calculate the price
of the bond.

Input 26 4 0 1000
N I PV PMT FV
Output -360.69

Problem 12
Calculate the price of a 9 percent bond with $1,000 par
and 6 years to maturity that pays semi-annual coupons.
The yield to maturity on similar bonds is 8.5 percent.

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 Input 12 4.25 45 1000
N I PV PMT FV
Output -1,023.13

Problem 13
A bond has a coupon rate of 7.5%, pays semiannual
interest, and has 12 years left to maturity. The bond’s
current price is $1,375. What is the yield to maturity?

Input 24 -1,375 37.50 1000

YTM = 2 x 1.81 = 3.62 percent

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Problem 14
A 15-year bond has 6 percent semiannual coupons. The
bond’s market price is $963.20. Calculate the Yield to
Maturity.

Yield to Maturity:

Input 30 -963.20 30 1000

YTM = 3.1925 x 2 = 6.38 percent

Problem 15
The yield on a municipal bond is 5.5%, and an investor’s
marginal tax rate is 35%. Calculate the investor’s
equivalent taxable yield on the bond.

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 Muni yield
Equivalent Taxable Yield 
1 - tax rate

Equivalent taxable yield = 5.5 / (1-.35) = 8.46%

Problem 16
The yield on a municipal bond is 5 percent, and the
equivalent taxable yield is 9 percent. Calculate the
investor’s marginal tax rate.

9 = 5/(1-T)
T = 1 – 5/9
= 44.44%

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Problem 17
Umbrella Corp. issued 12-year bonds 2 years ago at a coupon
rate of 8.5 percent. The bonds make semiannual payments.
These bonds currently sell for 88 percent of par value. What is
the YTM?

Problem 18
Krusty Krab Corporation has bonds on the market with 16.5
years to maturity, a YTM of 6 percent, and a current price of
$1,175. The bonds make semiannual payments. What must the
coupon rate be on these bonds?

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Problem 19
Even though most corporate bonds in the United States make
coupon payments semiannually, bonds Issued elsewhere often
have annual coupon payments. Suppose a German company
issues a bond with a par value of €1,000, 9 years to maturity,
and a coupon rate of 7.8 percent paid annually. If the yield to
maturity is 6.6 percent, what is the current price of the bond?

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Problem 20
A Japanese company has a bond outstanding that sells for 89
percent of its ¥ 100,000 par value. The bond has a coupon rate
of 5.2 percent paid annually and matures in 21 years. What is
the yield to maturity of this bond?

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