Question

Question 3 I. Colours Company 10% coupon bonds pay interest annually. When you bought one of these bonds, it had 20 years to maturity, and the appropriate discount rate was 7%. After one year, the discount rate on such bonds is 8%. You are considering to sell the bond.

a) Calculate the price at which you bought the bond.

b) Calculate the price at which you will sell the bond after one year.

c) Will you be happy with this investment? Explain. II. Allied Corp.'s bonds currently sell for $850. They have a 6.35% semiannual coupon rate and a 10-year maturity, but they can be called in 5 years at a call price of $1,060.50.

Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.

a) Calculate the nominal yield to maturity.

b) Calculate the nominal yield to call.

c) What rate of return should an investor expect to earn if he or she purchases these bonds? Explain your reasoning.

Mention the appropriate BA II Plus keys (where required).

Answer #1

Allied Corp.'s bonds currently sell for $850. They have a 6.35%
semiannual coupon rate and a 10-year maturity, but they can be
called in 5 years at a call price of $1,060.50. Assume that no
costs other than the call premium would be incurred to call and
refund the bonds, and also assume that the yield curve is
horizontal, with rates expected to remain at current levels on into
the future.
a) Calculate the effective yield to maturity.
b) Calculate...

a
20 year, 8% coupon rate, $1,000 par bond that pays interest
semi-annually bought five years ago for $850. this bond is
currently sold for 950. what is the yield on this bond?
a.12.23%
b.11.75%
c.12.13%
d.11.23%
an increase in interest rates will lead to an increase in the
value of outstanding bonds.
a. true
b. false
a bond will sell ____ when coupon rate is less than yield to
maturity, ______ when coupon rate exceeds yield to maturity, and...

3. Currently, BCA's bonds sell for $1,145. They pay a 8%
semi-annual coupon, have a 14-year maturity, and a $1,000 par
value, but they can be called in 5 years at $1,050. Assume that no
costs other than the call premium would be incurred to call and
refund the bonds, and also assume that the yield curve is
horizontal, with rates expected to remain at current levels on into
the future.
USE FINANCIAL CALCULATOR AND SHOW HOW
3a. What is...

Marco Verratti's bonds currently sell for $1,175.89with par
value of $1,000.00. The bonds pay 13.00 percent coupon
rate and have a 17-year maturity, but they can be called in 6 years
at $1,097.00. There are no costs but the call premium and refund
the bonds. In addition, assume that the yield curve is
horizontal, with rates expected to remain at current levels on into
the future. What is the bonds’ yield to maturity? What is the
bonds’ yield to call?

cayon Corporation's bonds have 15 years to maturity, an 8.75%
coupon paid semiannually, and a $1,000 par value. The bond has a
6.50% nominal yield to maturity, but it can be called in 10 years
at a price of $1,050. What is the bond's nominal yield to call?
*Mention the excel functions you used and the value of each
input you entered.

(Bond
valuationlong dash—zero
coupon)
The Latham Corporation is planning on issuing bonds that pay no
interest but can be converted into
$1,000at maturity, 7 years from their purchase. To price these
bonds competitively with other bonds of equal risk, it is
determined that they should yield 6 percent, compounded annually.
At what price should the Latham Corporation sell these bonds?
The price of the Latham Corporation bonds should be$
(Bond
valuation)
You are examining three bonds with a par value...

You just bought a newly issued bond which has a face value of
$1,000 and pays its coupon once annually. Its coupon rate is 5%,
maturity is 20 years and the yield to maturity for the bond is
currently 8%.
Do you expect the bond price to change in the future when the
yield stays at 8%? Why or why not? Explain. (No calculation is
necessary.)
2 marks)
Calculate what the bond price would be in one year if its...

You bought a 10-year zero-coupon bond with a face value of
$1,000 and a yield to maturity of 2.7% (EAR). You keep the bond for
5 years before selling it. The price of the bond today is P 0 = F (
1 + r ) T = 1,000 1.027 10 = 766.12
If the yield to maturity is still 2.7% when you sell the bond at
the end of year-5, what is your personal ANNUAL rate of return?

1. A $1,000 par value corporate bond that pays $60 annually in
interest was issued at par last year. The current price of the bond
is $996.20.
Pick the correct statement about this bond from below.
The bond is currently selling at a premium.
The current yield exceeds the coupon rate.
The bond is selling at par value.
The current yield exceeds the yield to maturity.
The coupon rate has increased to 7 percent.
2. Dot Inns is planning on...

You bought a 10-year
zero-coupon bond with a face value of $1,000 and a yield to
maturity of 3.4% (EAR). You keep the bond for 5 years before
selling it.
The price of the bond
today is P0=F(1+r)T=1,0001.03410=P0=F(1+r)T=1,0001.03410= 715.8
If the yield to
maturity is still 3.4% when you sell the bond at the end of year-5,
what is your personal annual rate of return?

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