CHAPTER 8 EXERCISES

2. Valuing Bonds Microhard has issued a bond with the following characteristics:
Par: $1,000
Time to maturity: 15 years
Coupon rate: 7 percent
Semiannual payments
Calculate the price of this bond if the YTM is:
a. 7 percent
b. 9 percent
c. 5 percent
* Semiannual payments:
● T= 15×2= 30
7%
● C= = 3.5% => C=3.5%×1000=35$
2
● FV= $1000
7%
a. r= = 3.5%
2
Bond Value= C×1−¿ ¿= 35×1−¿ ¿= 1000$
9%
b. r= = 4.5%
2
Bond Value= C×1−¿ ¿= 35×1−¿ ¿= 837.11$
5%
c. r= = 2.5%
2
Bond Value= C×1−¿ ¿= 35×1−¿ ¿= 1209.30$

3. Bond Yields Watters Umbrella Corp. issued 15-year bonds two years ago at a
coupon rate of 6.2 percent. The bonds make semiannual payments. If these bonds
currently sell for 98 percent of par value, what is the YTM?
*Semiannual payment:
● FV= 1000$
6.2 %
● C= ×1000=31$
2
● issued 15-year bonds two years ago => T= 13×2= 26

Bond Value= C×1−¿ ¿ ⇔ 980= 31×1−¿ ¿

● PV= 98%×1000= 980$

=> r=3.214%
=> YTM= 3.214%×2=6.428%
4. Coupon Rates Rhiannon Corporation has bonds on the market with 11.5 years
to maturity, a YTM of 6.8 percent, a par value of $1,000, and a current price of
$1,055.
The bonds make semiannual payments. What must the coupon rate be on these

Bonds on the market to maturity: 11,5 years ⇒ T = 11,5 x 2 = 23 years

bonds?

YTM = 6,8% ⇒ r = 6,8% / 2 = 3,4%.

Po = 1055$.
FV = 1000$.
● The bond pricing equation and solve for the coupon payment:

⇒ 1055 = C x [1 - (1 + 3,4%)-23] / 3,4% + 1000 / (1 + 3,4%)23

Po = C x [1 - (1+ r)-T] / r + FV/ (1 + r)T

⇒ C = 37,49$.
● Since this is the semiannual payment, the annual coupon payment is:
C x 2 = 37,49$ x 2 = 74,98$.
● And the coupon rate is the annual coupon payment divided by par value, so:
Coupon rate = 74,98$ / 1,000$ = 0.07498 or 7.498%

5. Valuing Bonds 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, 15 years to maturity, and a coupon rate of 5.1 percent paid annually. If
the yield to maturity is 4.3 percent, what is the current price of the bond?
US - coupon payments semiannually
Issued elsewhere - annual coupon payments
German: FV = 1000€.
M = 15 years.
Coupon rate = 5,1%
YTM = r = 4,3%.
● The annual coupon payments:
C = FV x coupon rate = 1000 x 5,1% = 51€.
● The current price of the bond:
Po = C x [1 - (1+ r)-T] / r + FV/ (1 + r)T
= 51 x [1 - (1 + 4,3%)-15] / 4,3% + 1000 / (1 + 4,3%)15 = 1087,11€.
6. Bond Yields A Japanese company has a bond outstanding that sells for 106
percent of its ¥100,000 par value. The bond has a coupon rate of 2.8 percent paid
annually and
matures in 17 years. What is the yield to maturity of this bond?
Bond outstanding that sells for 106%.
FV = 100.000¥.
Coupon rate = 2,8% paid annually.

⇒ YTM of this bond?

M = 17 years

● The current price 106% of par value:

Po = FV x 106% = 100.000 x 106% = 106.000¥
● The annual coupon payments:
C = FV x coupon rate = 100.000 x 2,8% = 2.800¥
● YTM of this bond:
Po = C x [1 - (1+ r)-T] / r + FV/ (1 + r)T
=> 106.000 = 2.800 x [1 - (1 + r)-17] / r + 100.000 / (1 + r)17
=> r = 2,37%.
=> YTM = r = 2,37% (paid annually).

15. Using Treasury Quotes Locate the Treasury bond in Figure 8.4 maturing in
Novem-ber 2039. Is this a premium or a discount bond? What is its current
yield? What is its yield to maturity? What is the bid-ask spread in dollars?
Assume a par value of $10,000.
* The bond maturing in November 2039 has the following details:
- Coupon Rate: 4.375%
- Bid Price: 128.4063
- Asked Price: 128.4688
- Price Change: -0.1875
- Asked Yield: 2.665%
* A bond is considered a premium bond if its price is above its par value, and a
discount bond if its price is below its par value.
- Asked Price: 128.4688
- Par Value: $10,000 The asked price in dollars is: 128.4688/10,000 = $12.84688
Since $12,846.88 is greater than 10,000, this bond is a premium bond.
* The current yield is calculated using the formula:
Current Yield = Annual Coupon Payment / Asked Price
- Annual Coupon Payment: 4.375% x $10,000 = $437.50
- Current Price: 128.4688% x $10,000 = $12,846.88
So, Current Yield = $437.50 / $12,846.88 = 3.41%
➡ The current yield is approximately 3.41%
* Calculate the Bid-Ask Spread in Dollars
The bid-ask spread is the difference between the bid price and the asked price.
- Bid Price: 128.4063
- Asked Price: 128.4688
Bid-ask spread = Asked Price - Bid Price = 128.4688 - 128.4063 = 0.0625
Since the par value is $10,000, the bid-ask spread in dollars is:
Bid-Ask Spread In Dollars = 0.0625% x $10,000 = $6.25
* Calculate the Yield to Maturity (YTM):

- C = Annual coupon payment = $437.50

- F = Face value = $10,000
- P = Current Price = $12,846.88
- n = Number of years to maturity = 16 years

Final Answers:
- Premium Bond
- Current Yield: 3.41%
- Bid-Ask Spread: $6.25
- Yield To Maturity: 2.27%

16. Zero Coupon Bonds You buy a zero coupon bond at the beginning of the year
that has a face value of $1,000, a YTM of 5.7 percent, and 20 years to maturity. If
you hold the bond for the entire year, how much in interest income will you have
to declare on your tax return? Assume semiannual compounding.

0 1 2 ……………. 40
$1000
Taxable income

FV= $1000
YTM= 5,7%/2 = 2,85%
N= 20*2 = 40
Coupon payment = 0

Discount the face value of the 20th year back to the present => Po = $324,96
Discount the face value of the 20th year back to the first year (N=40-2=38) => P 1 =
$343,75

 Taxable income = $343,75 - $324,96 = $18,79

17. Bond Price Movements Miller Corporation has a premium bond making
semiannual payments. The bond pays a coupon of 6.5 percent, has a YTM of 5.3
percent, and has 13 years to maturity. The Modigliani Company has a discount
bond making semiannual payments. This bond pays a coupon of 5.3 percent, has
a YTM of 6.5 percent, and also has 13 years to maturity. Both bonds have a par
value of $1,000. If interest rates remain unchanged, what do you expect the price
of these bonds to be 1 year from now? In 3 years? In 8 years? In 12 years? In 13
years? What’s going on here? Illustrate your answers by graphing bond prices
versus time to maturity.

Miller Corporation
FV: $1000
r 5 ,3 %
YTM: 5,3%=> = = 2,65%
2 2
Time to maturity: 13 years=> T= 13
Coupon rate=6,5% => Coupon payment = 1000*6,5%/2= 32,5$
Case 1: After 1 Year => Time to maturity has 12 years left=> T=12=> 2*T=24
The expected price:
r −2T FV
1−(1+ )
C 2
P 1= * + r
2T
2 r (1+ )
2
2
1−(1+ 2, 65 %)
−24
1000
= 32,5* + 24 = 1105,55$
2 , 65 % (1+2 , 65 %)
Case 2: After 3 years => Time to maturity has 10 years left=> T=10 => 2*T=20
−2T
r FV
1−(1+ )
C 2
P3= * + r
2T
2 r (1+ )
2
2
1−(1+ 2, 65 %)
−20
1000
= 32,5* + 20 = 1092,22$
2 ,65 % (1+2 , 65 %)
Case 3: After 8 Years => Time to maturity has 5 years left=> T=5 => 2*T=10
r −2T FV
1−(1+ )
C 2
P8 = * + r
2T
2 r (1+ )
2
2
1−(1+ 2, 65 %)
−10
1000
= 32,5* + 10 = 1052,11$
2 ,65 % (1+2 , 65 %)
Case 4: After 12 Years => Time to maturity has 1 years left=> T=1 => 2*T=2
−2T
r FV
1−(1+ )
C 2
P8 = * + r
2T
2 r (1+ )
2
2
1−(1+ 2, 65 %)
−2
1000
= 32,5* + 2 =1011,54$
2 , 65 % (1+2 , 65 %)
Case 5: After 13 Years => Time to maturity has 0 years left=> T=0=> 2*T=0
r −2T FV
1−(1+ )
C 2
P8 = * + r
2T
2 r (1+ )
2
2
1−(1+ 2, 65 %)
−0
1000
= 32,5* + 0 =1000$= FV
2, 65 % (1+2 , 65 %)
Modigliani Company
FV: $1000
r 6 ,5 %
YTM: 6,5%=> = = 3,25%
2 2
Time to maturity: 13 years=> T= 13
Coupon rate=5,3% => Coupon payment = 1000*5,3%/2= 26,5$
Case 1: After 1 Year => Time to maturity has 12 years left=> T=12=> 2*T=24
The expected price:
−2T
r FV
1−(1+ )
C 2
P 1= * + r
2T
2 r (1+ )
2
2
1−(1+ 3 ,25 % )
−24
1000
= 26,5* + 24
3 , 25 % (1+3 , 25 %)
= 901,07$
Case 2: After 3 years => Time to maturity has 10 years left=> T=10 => 2*T=20
−2T
r FV
1−(1+ )
C 2
P3= * + r
2T
2 r (1+ )
2
2
1−(1+ 3 ,25 % )
−20
1000
= 26,5* + 20
3 , 25 % (1+3 , 25 %)
= 912,76$
Case 3: After 8 Years => Time to maturity has 5 years left=> T=5 => 2*T=10
−2T
r FV
1−(1+ )
C 2
P8 = * + r
2T
2 r (1+ )
2
2
1−(1+ 3 ,25 % )
−10
1000
= 26,5* + 10
3 , 25 % (1+3 , 25 %)
= 949,47$
Case 4: After 12 Years => Time to maturity has 1 years left=> T=1 => 2*T=2
−2T
r FV
1−(1+ )
C 2
P8 = * + r
2T
2 r (1+ )
2
2
1−(1+ 3 ,25 % )
−2
1000
= 26,5* + 2
3 , 25 % (1+3 , 25 %)
= 988,56$
Case 5: After 13 Years=> Time to maturity has 0 years left=> T=0=> 2*T=0
−2T
r FV
1−(1+ )
C 2
P8 = * + r
2T
2 r (1+ )
2
2
1−(1+ 3 ,25 % )
−0
1000
= 26,5* + 0
3 ,25 % (1+3 , 25 %)
= 1000$= FV

- Graph of bond price by maturity time.