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# Penn State - RUS 100 - Reid Moncada - Study Guide

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Penn State - RUS 100 - Reid Moncada - Study Guide

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How to Value Bonds 5.1 What is the present value of a 10-year, pure discount bond paying \$1,000 at maturity if the
appropriate interest rate is:
a. 5 percent? b. 10 percent? c. 15 percent? 5.2 Microhard has issued a bond with the following characteristics: Principal: \$1,000
Time to maturity: 20 years
Coupon rate: 8 percent, compounded semiannually
Semiannual payments
Calculate the price of this bond if the stated annual interest rate, compounded semiannually, is: a. 8% b. 10% c. 6% 5.3 Consider a bond with a face value of \$1,000.  The coupon payment is made semiannually and the
yield on the bond is 12% (effective annual yield).  How much would you pay for the bond if
a. the coupon rate is eight percent and the remaining time to maturity is 20 years? b. the coupon rate is 10 percent and the remaining time to maturity is 15 years?   5.4 Jay’s Trucking, Inc. has issued an eight percent, 20-year bond paying interest semiannually.  The
bond has a face value of \$1,000.  If the yield on the bond is 10 percent (effective annual yield),
what is the price of the bond?
5.5 A bond is sold at \$923.14 (below its par value of \$1,000).  The bond matures in 15 years and has a
10-percent yield, expressed as a stated annual interest rate, compounded semiannually.  What is
the coupon rate on the bond if the coupon is paid semiannually?  The next payment occurs six
months from today.
5.6 You have just purchased a newly-issued \$1,000 five-year Vanguard Company bond at par.  This
five-year bond pays \$60 in interest semiannually.  You are also considering the purchase of
another Vanguard Company bond that pays \$30 in semiannual interest payments and has six years
remaining before maturity.  This bond has a face value of \$1,000.
a. What is the yield on the five-year bond (expressed as an effective annual yield)? b. Assume that the five-year bond and the six-year bond have the same yield.  What should
you be willing to pay for the six-year bond?
c. How will your answer in part (b) change if the five-year bond pays \$40 in semiannual
interest instead of \$60?  Assume that the five-year bond paying \$40 semiannually is
purchased at par.
Copyright 2003, McGraw-Hill.  All rights reserved.
Bond Concepts 5.7 Consider two bonds, A and B.  The coupon rates are 10 percent and the face values are \$1,000 for
both bonds.  Both bonds have annual coupons.  Bond A has 20 years to maturity while bond B has
10 years to maturity.
a. What are the prices of the two bonds if the relevant market interest rate for both bonds is
10 percent?
b. If the market interest rate increases to 12 percent, what will be the prices of the two
bonds?
c. If the market interest rate decreases to eight percent, what will be the prices of the two
bonds?
5.8 a. If the market interest rate unexpectedly increases, what would be the effect on the prices  of long-term bonds?  Why? b. How would a rise in the interest rate affect the general level of stock prices?  Why? 5.9 Consider a bond paying an annual coupon of \$80 with a face value of \$1,000.  Calculate the yield
to maturity if the bond has
a. 20 years remaining to maturity and is priced at \$1,200. b. 10 years remaining to maturity and is priced at \$950. 5.10 HexCorp Inc. has two different bonds currently outstanding.  Bond A has a face value of \$40,000
and matures in 20 years.  The bond makes no payments for the first six years, pays \$2,000
semiannually for the subsequent eight years, and finally pays \$2,500 semiannually for the last six
years.  Bond B also has a face value of \$40,000 and matures in 20 years.  However, it makes no
coupon payments over the life of the bond.  If the stated annual interest rate is 12 percent,
compounded semiannually,
a. what is the current price of Bond A?
b. what is the current price of Bond B?
5.11 Use the following February 11, 2002 Wall Street Journal quotation for AT&T Corp.  Which of the
following statement are false?
a. The closing price of the bond with the shortest time to maturity is \$1,000. b. The annual coupon for the bond maturing in 2018 is \$90.00. c. The price on the day before this quotation (February 9) for the AT&T bond maturing in
2024 is \$1,075 per bond contract.
d. The current yield on the AT&T bond maturing in 2004 is 7.125 percent. e. The AT&T bond maturing in 2004 has a yield to maturity of less than 7.125 percent. Bonds Current Yield Volume Close Net Change ATT 9s 18 ? 10 117 + 1/4 ATT 5 1/8 03 ? 5 100 + 3/4 ATT 7 1/8 04 ? 193 104 1/8 + 1/4 ATT 8 1/8 24 ? 39 107 3/8 - 1/8 Copyright 2003, McGraw-Hill.  All rights reserved.

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