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Corporate Finance eBook

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Chapter8: Interest Rates and Bond Valuation

Questions and Problems

1. Valuing Bonds What is the price of a 10-year, zero coupon bond paying $1,000 at maturity if the YTM is: BASIC (Questions 1– 12) a. 5 percent? b. 10 percent? c. 15 percent? 2. Valuing Bonds Microhard has issued a bond with the following characteristics: Par: $1,000 Time to maturity: 25 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 3. Bond Yields Watters Umbrella Corp. issued 12-year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM? 4. Coupon Rates Rhiannon Corporation has bonds on the market with 13.5 years to maturity, a YTM of 7.6 percent, and a current price of $1,175. The bonds make semiannual payments. What must the coupon rate be on these bonds? 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 8.4 percent paid annually. If the yield to maturity is 7.6 percent, what is the current price of the bond? 6. Bond Yields A Japanese company has a bond outstanding that sells for 87 percent of its ¥100,000 par value. The bond has a coupon rate of 5.4 percent paid annually and matures in 21 years. What is the yield to maturity of this bond? 7. Calculating Real Rates of Return If Treasury bills are currently paying 5 percent and the inflation rate is 3.9 percent, what is the approximate real rate of interest? The exact real rate? 8. Inflation and Nominal Returns Suppose the real rate is 2.5 percent and the inflation rate is 4.7 percent. What rate would you expect to see on a Treasury bill? 9....

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