Question

2. A high-yield bond with the following features:

**Principal
$1,000**

**Coupon
8%**

**Maturity
7 years**

**Special Features
company may extend the life of the bond to 14 years**

The current interest rate is 6%.

a) If you expect that interest rates will be 8 percent five years from now, how much would you currently pay for this bond?

b) What is your potential gain or loss if you buy the bond based on that expectation but interest rates are 10 percent five years from now?

Answer #1

Principal or FV = 1000

Coupon = 8%

So PMT = 80

Maturity N = 7 years

I/Y = 6%

CPT PV using the financial calculator

PV = 1111.64

a.)

After 5 years

N = 2

I/Y = 8%

Since I/Y becomes equal to the coupon rate the PV = Par value = 1000

b.)

If we purchase the bond on the expectation that company might extend the life of bond to 14 years

After 5 years,

N = 9 (14-5)

I/Y = 10%

PMT = 80

FV = 1000

CPT PV in the financial calculator

We get PV = 884.81

If we would have purchased the bond 5 years before we would have to pay the initial PV of $1111.64

But now we have to pay 884.81.

So gain = 1111.64 - 884.81 = 226.83

Two bonds have the following
terms:
Bond A
Principal
$1,000
Coupon
8%
Maturity
10
years
Bond B
Principal
$1,000
Coupon
7.6%
Maturity
10
years
Bond B has an additional feature: It
may be redeemed at par after five years (i.e., it has a put
feature). Both bonds were initially sold for their face amounts
(i.e., $1,000).
If interest rates fall to 7 percent, what will be the price of
each bond?
If interest rates rise to 9 percent,
what will...

A bond has the following features: Coupon rate of interest (paid
annually): 11 percent Principal: $1,000 Term to maturity: 8
years
What will the holder receive when the bond matures?
__________
If the current rate of interest on comparable debt is 8 percent,
what should be the price of this bond? Assume that the bond pays
interest annually. Use Appendix B and Appendix D to answer the
question. Round your answer to the nearest dollar.
$________
Would you expect the...

A.
Bond Features
Maturity (years) =
10
Face Value =
$1,000
Starting Interest Rate
4.98%
Coupon Rate =
4%
Coupon dates (Annual)
If interest rates change from 4.98% to 6.58% immediately after
you buy the bond today (and stay at the new interest rate), what is
the price effect in year 3 ?
State your answer to the nearest penny (e.g., 48.45)
If there is a loss, state your answer with a negative sign
(e.g., -52.30)
B.
Bond Features
Maturity...

Bond A has the following features: Face value = $1,000, Coupon
Rate = 5%, Maturity = 9 years, Yearly coupons The market interest
rate is 7.92% If interest rates remain at 7.92%, what is the
percentage capital gain or loss on bond A if you sell the bond in
year 1? State your answer to 2 decimal places (e.g., 3.56, 0.29) If
there is a capital loss make sure to include a negative sign in
your answer (e.g., -0.23).

Bond A has the following features:
Face value =
$1,000,
Coupon Rate = 9%,
Maturity = 6 years, Yearly coupons
The market
interest rate is 5.34%
If interest rates remain at 5.34%, what is the percentage
capital gain or loss on bond A if you sell the bond in year 1?
State your answer to 2 decimal places (e.g., 3.56, 0.29)
If there is a capital loss make sure to include a negative sign
in your answer (e.g.,...

Bond A has the following features: Face value = $1,000, Coupon
Rate = 10%, Maturity = 9 years, Yearly coupons The market interest
rate is 3.41% If interest rates remain at 3.41%, what is the
percentage capital gain or loss on bond A if you sell the bond in
year 1? State your answer to 2 decimal places (e.g., 3.56, 0.29) If
there is a capital loss make sure to include a negative sign in
your answer (e.g., -0.23)

Bond Features
Maturity (years) =
8
Face Value =
$1,000
Starting Interest Rate
4.23%
Coupon Rate =
4%
Coupon dates (Annual)
If interest rates change from 4.23% to 5.02% immediately after
you buy the bond today (and stay at the new interest rate), what is
the price effect in year 4 ?
State your answer to the nearest penny (e.g., 48.45)
If there is a loss, state your answer with a negative sign
(e.g., -52.30)

Bond Features
Maturity (years) =
8
Face Value =
$1,000
Starting Interest Rate
4.32%
Coupon Rate =
4%
Coupon dates (Annual)
If interest rates change from 4.32% to 6.72% immediately after
you buy the bond today (and stay at the new interest rate), what is
the price effect in year 4 ?
State your answer to the nearest penny (e.g., 48.45)
If there is a loss, state your answer with a negative sign
(e.g., -52.30)

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Maturity (years) =
8
Face Value =
$1,000
Starting Interest Rate
4.23%
Coupon Rate =
4%
Coupon dates (Annual)
If interest rates change from 4.23% to 5.02% immediately after
you buy the bond today (and stay at the new interest rate), what is
the price effect in year 4 ?
State your answer to the nearest penny (e.g., 48.45)
If there is a loss, state your answer with a negative sign
(e.g., -52.30)

9-
Bond Features
Maturity (years) =
8
Face Value =
$1,000
Starting Interest Rate
3.81%
Coupon Rate =
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Coupon dates (Annual)
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you buy the bond today (and stay at the new interest rate), what is
the price effect in year 4 ?
State your answer to the nearest penny (e.g., 48.45)
If there is a loss, state your answer with a negative sign
(e.g., -52.30)

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