FIN 3010 Chapter 7 In-Class Problems Fall 2024
Show Your Work! If work is not shown, only half credit will be given. For late
work, 2 points will be deducted per day late. Including if you did the work in class
but forgot to submit.
1. Bond Values A Microgates Industries bond has a 10% coupon rate and a
$1,000 face value. Interest is paid semiannually, and the bond has 20 years
to maturity.
a. If investors requires a 12% yield, what is the bond’s value?
C=1,000*.10/2=50
N=20*2=40 semiannual periods
r=.12/2=.06
PV coupons=50[1-1/(1+.06)^40]/.06=752.32
PV face value =1/(1+0.06)^40 =97.22
Bond Value=752.32+97.22=849.54
b. What is the effective annual yield on the bond?
EAY=[(1+i/m)^m]-1
EAY=[(1+.12/2)^2]-1=.1236
EAY=12.36%
2. Bond Yields A Macrohard Corp. bond carries an 8% coupon, paid
semiannually. The par value is $1,000, and the bond matures in 6 years.
a. If the bond currently sells for $911.37, what is its yield to maturity?
P=911.37 C=(.08*1000)/2=40
F=1000 C=40
Semiannual coupon rate=.04 Annual YTM=.05*2=.10
b. What is the effective annual yield?
EAY=[1+(i/m)^m]-1
EAY=[1+(.1/2)^2]-1=.1025
EAY=10.25%
FIN 3010 Chapter 7 In-Class Problems Fall 2024
3. Bond Price Movements Bond X is a premium bond making semiannual
payments. The bond pays a coupon rate of 7.1%, have a YTM of 6.4%, and
has 13 years to maturity. Bond Y is a discount bond making semiannual
payments. This bond pays a coupon rate of 6.4%, has a YTM of 7.1%, and
also has 13 years to maturity. The bonds have a par value of $1,000.
a. What is the price of each bond today?
Bond X
C=(.071*1000)/2=35.5
N=13*2=26
r=.064/2=.o32
Px =(26∑t=1) [35.5/(1+0.032)^t]+1000/(1+0.032)^26=3736.59
Bond Y
C=(6.4*1000)/3=32
N=13*2=26
r=.071/3=.0355
PY =(26∑1=t) [32/(1+0.0355)^t]+1000(1+0.0355)^26=39125.02
b. If interest rates remain unchanged, what do you expect the price of
these bonds to be 1 year from now?
Bond X= 41822.99
Bond Y= 43987.7
c. 3 years?
Bond X=51634.95
Bond Y=54792.6
d. 8 years?
FIN 3010 Chapter 7 In-Class Problems Fall 2024
Bond X=82322.36
Bond Y= 89423.2
4. Interest Rate Risk Bond J has a coupon rate of 3%. Bond K has a coupon
rate of 9%. Both bonds have 18 years to maturity, make semiannual
payments, and have a YTM of 7%.
a. If interest rates suddenly rise by 2%, what is the percentage price
change of these bonds?
Bond J:
Bond K:
b. What if rates suddenly fall by 2% instead?
Bond J:
Bond K:
5. Bond Yields Penguin Software has 5.9% coupon bonds on the market with
18 years to maturity. The bonds make semiannual payments and currently
sell for 106.32% of par.
a. What is the current yield on the bonds?
59 / 1063.2 = 0.0555 or 5.55%
FIN 3010 Chapter 7 In-Class Problems Fall 2024
b. What is the YTM?
5.2%
c. What is the effective annual yield?
(1 + (.052 / 2))^2 - 1 = 0.05268 or 5.27%
6. Finding the Bond Maturity Morikawa Corp. has 8% coupon bonds making
annual payments with a YTM of 7.2%. The current yield on these bonds is
7.55%.
a. How many years do these bonds have left until they mature?
11.06
