Spring, 2014

Assignment 3

(Due by May 28, 2014)

Please solve the following questions. If you prefer to work in a group in completing this assignment, you may do so. Groups are limited to a maximum size of 3 students. If you work in a group, the group will turn in one solution to the assignment and everyone in the group will receive the same grade on the assignment. If you work in a group, please make sure that you write down the names of all of your group members. If more than one group works together and turns in, substantially, the same work, this violates the rules of the course and the rules on academic integrity, and penalties will be assessed. The assignment is due at the beginning of class on the due date. Please show all the intermediate steps and calculations when solving the problems and state your assumptions (if any). Please type your answers.

1. Use the following corporate bond price quote information to answer the questions that follow. Assume the company makes semi-annual coupon payments and also assume the bond matures on today’s date (May 28) in its maturity year. Note that price is expressed in percentage of par value.

Company

XYZ Inc.

Coupon

7.000

Maturity

May. 28,

2017

Price

97.667

Yield

a. How much would this bond cost you to buy today if its par value is $1000? b. What is the bond’s yield to maturity?

c. If your required return is 9% APR, would you buy this bond today? Show work to prove why or why not.

2. A year ago, you purchased two bonds issued by the same company, ABC Co. : (1) a 20year $1,000 par value, annual coupon bond with a 7 percent coupon rate, and (2) a 5-year $1,000 par value, annual coupon bond also with a 7 percent coupon rate. Both bonds had a yield to maturity (required rate of return) of 9 percent when you bought them. a. What price did you pay for each bond a year ago?

b. Today, assume the yield to maturity on both bonds is 11 percent. What is total rate of return on each bond if...

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