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Bonds

By | Feb. 2012
Page 1 of 4
BOND PROBLEM SOLUTIONS

1. Six years ago, The Corzine Company sold a 20-year bond issue with a 14 percent annual coupon rate and a 9 percent call premium. Today, Corzine called the bonds. The bonds originally were sold at their face value of $1,000. Compute the realized rate of return for investors who purchased the bonds when they were issued and who surrender them today in exchange for the call price.

PV = 1000; N = 6; PMT = 140; FV = 1090; CPT I/Y
I/Y = 15.02%

2. You just purchased a bond which matures in 5 years. The bond has a face value of $1,000, and has an 8 percent annual coupon. The bond has a current yield of 8.21 percent. What is the bond’s yield to maturity?

CURRENT YIELD = ANNUAL COUPON ( PV
0.0821 = 80 ( PV
PV = 80 ( 0.0821 = 974.42
N = 5; PMT = 80; FV=1000; PV = 974.42 CPT I/Y
I/Y = 8.65%

3. The Dass Company’s bonds have 4 years remaining to maturity. Interest is paid annually; the bonds have a $1,000 par value; and the coupon interest rate is 9 percent. What is the yield to maturity at a current market price of $829? Would you pay $829 for one of these bonds if you thought that the appropriate rate of return was 12 percent?

PV = 829; N = 4; FV = 1000; PMT =90; CPT I/Y
I/Y = 14.99%
YES, IF YOU THOUGHT THE APPROPRIATE RATE WAS 12%, YOUR PV WOULD ACTUALLY BE HIGHER MEANING YOU WOULD BE WILLING TO PAY MORE THAN $829.

4. Sitel Inc. has a bond which matures in 7 years and currently sells for $1,020. The bond has a face value of $1,000 and a yield to maturity of 10.5883 percent. The bond pays coupons semiannually. What is the bond’s current yield?

CURRENT YIELD = ANNUAL COUPON ( PV
FV = 1000; PV = 1020; I/Y = 10.5583 ( 2 = 5.2942; N = 14; CPT PMT PMT = $55
ANNUAL COUPON = 55x2 =110
CURRENT YIELD = 110 ( 1020 = 10.78%

5. Look up the prices of AT&T bonds in the Wall Street Journal. If AT&T were to sell a new issue of $1,000 par value long-term bonds,...
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