Ch. 10 Assignment
4. A coupon bond paying semiannual interest is reported as
having an ask price of 117% of its $1,000 par value. If the last
interest payment was made one month ago and the coupon rate
is 6%, what is the invoice price of the bond? (LO 10-1)
12. You buy an eight-year bond that has a 6% cu
ent yield and a
6% coupon (paid annually). In one year, promised yields to
maturity have risen to 7%. What is your holding-period
eturn? (LO 10-3)
28. A two-year bond with par value $1,000 making annual coupon
payments of $100 is priced at $1,000. What is the yield to
maturity of the bond? What will be the realized compound yield
to maturity if the one-year interest rate next year turns out to
e (a) 8%, (b) 10%, (c) 12%? (LO 10-6)
35. Masters Corp. issues two bonds with 20-year maturities. Both
onds are callable at $1,050. The first bond is issued at a deep
discount with a coupon rate of 4% and a price of $580 to yield
8.4%. The second bond is issued at par value with a coupon
ate of 8.75%. (LO 10-2)
a. What is the yield to maturity of the par bond? Why is it higher
than the yield of the discount bond?
. If you expect rates to fall substantially in the next two years,
which bond would you prefer to hold?
c. In what sense does the discount bond offer “implicit call
protection”?
2. On May 30, 2015, Janice Ke
is considering the newly issued
10-year AAA corporate bonds shown in the following
exhibit: (LO 10-3) Both bonds pay semi-annual coupons.
a. Suppose that market interest rates decline by 100 basis points
(i.e., 1%). Contrast the effect of this decline on the price of each
ond.
. Should Ke
prefer the Colina over the Sentinal bond when rates
are expected to rise or to fall?
5. Bonds of Zello Corporation with a par value of $1,000 sell fo
$960, mature in five years, and have a 7% annual coupon rate
paid semiannually. (LO 10-6)
a. Calculate the:
(1) Cu
ent yield.
(2) Yield to maturity.
(3) Horizon yield (also called realized compound return) for an
investor with a three-year holding period and a reinvestment
ate of 6% over the period. At the end of three years the 7%
coupon bonds with two years remaining will sell to yield
7%.
. Cite one major shortcoming for each of the following fixed-
income yield measures:
(1) Cu
ent yield.
(2) Yield to maturity.
(3) Horizon yield (also called realized compound return).