Interest Rates & Bond Valuation

Assignment Requirements

 

Use Chapter 7.

1. Suppose a 12% coupon bond sells at par today; and three years from today, the required rate on the same bond is 8%. What is the coupon rate on the bond today and what will it be 3 years from today. What is the par value today and what will it be three years from today?

2. XYZ Corp. needs to raise funds to finance a plant expansion. Mgt. decided to issue 25-year zero coupon bonds to raise the money. The required rate of return is 5%. What will these bonds sell at issuance?

3. ABC Corp. has 6% coupon bonds on the market that have 8 years left to maturity. The bonds make annual payments. If the yield to maturity is 7%, what is the current bond price?

4. What happens to the price of a three-year bond with an 8% coupon when interest rates change from 8% to 6%? How much will it change from par?

5. GHI Corp. has bonds on the market making annual payments, with 15 years to maturity and selling for $1,103.78. At this price the bond’s current yield is 5.44%. What is the coupon rate for this bond?

6. Visit the http://noir.bloomberg.com/markets/rates/keyrates.html site. Write down the current prime rate, 15-year mortgage rate, the 3 month T-Bill rate and the 5-year T-Bond rate (for the USA). Are you surprised?

7. In a recent issue of The Wall Street Journal the following Treasury bond quote was published:

Rate	Maturity Mo/Yr	Bid	Asked	Change	Ask yield
3 1/8	Apr 09 n	99:25	99:26	-2	3.24

 

What do these numbers mean?

8. Two years ago bonds were issued with 10 years until maturity, selling at par, and a 7% coupon. If interest rates for that grade of bond are currently 8.25%, what will be the market price of these bonds?

9. You have invested the fortune ($1,000,000) you inherited in the bond market. The headlines in today’s paper are “Bond prices up today”. Is that good or bad news for you?

10. Go to the Yahoo finance website. Go to the Bond Screener page. From the Bond Type select corporate, from the Select Bond Criteria select “premium” (it is under price). Click on bonds. When the list comes up select any one of the bonds, click on it and summarize your findings on the bulletin board.

 

11. U.S. Treasury bonds are not rated. Why?

 

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