(Valuation of Bonds and Shares)

1. Verbrugge Company has a level-coupon bond outstanding that pays coupon interest of $120 per year and has 10 years to maturity. The face value of the bond is $1,000. If the yield for similar bonds is currently 14%, what is the bond's current market value? [Ans: $ 895.68]

2. For the Verbrugge Company bond described in Problem 1, find the bond's value if the yield for similar bonds decreases to 12%. [Ans: $ 1,000]

3. For the Verbrugge Company bond described in Problem 1, find the bond's value if the yield for similar bonds decreases to 9%. [Ans: 1192.53]

4. What conclusions can you draw out of the solutions of the problems 1, 2 and 3 ?

5. Suppose the Verbrugge bond paid interest semiannually. What would its value be if the yield is 14%? [Ans: $ 894.06]

6. Sasha Company has a level-coupon bond with a 9% coupon rate; interest is paid annually. The bond has 20 years to maturity and a face value of $1,000; similar bonds currently yield 7%. By prior agreement the company will skip the coupon interest payments in years 8, 9, and 10. These payments will be repaid, without interest, at maturity. What is the bond's value? [Ans: $ 1134.56]

7. The market price of a Rs 1,000 par value bond carrying a coupon rate of 14 % and maturing after 5 years is Rs 1,050. What is the yield to maturity on this bond ? What is the approximate YTM ? [Ans: 12.60 %, 12.62 %]

8. A firm issues a bond today with a $1,000 face value, an 8% coupon interest rate, and 25-year maturity. An investor purchases the bond for $1,000. What is the yield to maturity (YTM)? [Ans: 8%]

9. Suppose the investor bought the bond described in the previous problem for $900. What is the YTM? [Ans: 9.0197]

10. Suppose the bond described in the previous two problems has a price of $1,100 five years after it is issued. What is the YTM at that time? [Ans: 7.0522]

11. If the real rate is 4% and the inflation rate is 10%, what is the...

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