Question

1.)

Last year Janet purchased a $1,000 face value corporate bond with an 8% annual coupon rate and a 15-year maturity. At the time of the purchase, it had an expected yield to maturity of 12.09%. If Janet sold the bond today for $1,055.86, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.

2.)

Bond X is noncallable and has 20 years to maturity, a 11% annual coupon, and a $1,000 par value. Your required return on Bond X is 10%; if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 11.5%. How much should you be willing to pay for Bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.) Do not round intermediate calculations. Round your answer to the nearest cent.

3.)

Lourdes Corporation's 14% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 10 years, are callable 6 years from today at $1,050. They sell at a price of $1,392.83, and the yield curve is flat. Assume that interest rates are expected to remain at their current level.

What is the best estimate of these bonds' remaining life? Round your answer to two decimal places.
  years

If Lourdes plans to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par?

Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTM.

Since Lourdes wishes to issue new bonds at par value, the coupon rate set should be the same as that on the existing bonds.

Since Lourdes wishes to issue new bonds at par value, the coupon rate set should be the same as the current yield on the existing bonds.

Since interest rates have risen since the bond was first issued, the coupon rate should be set at a rate above the current coupon rate.

Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTC.

Answer 1

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