BONDS

Some terms to know:

Par value = Future Value=: $1000 most text books or $100 (real world).

Coupon Rate= Interest rate used to calculate payment (annuity)

bond Payment = coupon rate * par value

Payment could be made semi-annually, quarterly, monthly, bi-weekly, annually, daily (no very common).

Premium Bonds = Bond is priced over par (think expensive)

Discount Bond= Bond is priced below par

Yield to Maturity = Interest Rate if bond goes to Maturity

Yield to Call = Interest Rate if bond is called or does not reach maturity

Call Price = Price at which bond is called.

Price of bond (Po) = Price of Bond today or Present Value (PV)

Future value of bond = Generally will be Par value of $100 or $1000 (depending on text)

Nper or N = Periods till maturity or call

Bond is a form of annuity.

An annuity is just a constant (fixed) stream of payment for a fixed period or perpetuity.

Annuity Due = Payment made at the beginning (for example your fixed mortgage payment at the beginning of each month could be considered an annuity due if that helps).

Ordinary Annuity= Payment made at the end of term.

Zero coupon bond = zero coupon rate = zero payment

You may use your Excel or Financial Calculator to assist with Bond type questions.

Sample Problems.

1.The 13.77 percent coupon bonds of the Peterson Co. are selling for $834.41. The bonds mature in 5 years and pay interest semi-annually. These bonds have current yield of _____ percent.

2.You paid $1,128 for a corporate bond that has a 6.64% coupon rate. What is the current yield?

3. The yield to maturity on a Marshall Co. premium bond is 7.6 percent. This is the:

a) nominal rate.

b) effective rate.

c) real rate.

d) current yield.

4. ABC has issued a bond with the following characteristics:

Par: $1,000; Time to maturity: 8 years; Coupon rate: 4%;

Assume semi-annual coupon payments. Calculate the price of this bond if the YTM is 6.92%

5. ABC has issued a bond with the following characteristics:

Par: $1,000; Time to maturity: 16 years; Coupon rate: 4%;

Assume semi-annual coupon payments. Calculate the price of this bond if the YTM is 9.64%

6. A premium bond is a bond that:

a) has a market price which exceeds the face value.

b) has a face value in excess of $1,000.

c) is selling for less than par value.

d) has a par value which exceeds the face value.

e) is callable within 12 months or less.

7. ABC wants to issue 8-year, zero coupon bonds that yield 11.64 percent. What price should they charge for these bonds if they have a par value of $1,000? That is, solve for PV. Assume annual compounding.

Hint: zero coupon bonds means PMT = 0

8. The 8 percent coupon bonds of the Peterson Co. are selling for 98 percent of par value. The bonds mature in 5 years and pay interest semi-annually. These bonds have a yield to maturity of _____ percent.

9. ABC’s Inc.’s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?

10. A bond which sells for less than the face value is called a:

a) discount bond.

b) debenture.

c) perpetuity.

d) par value bond.

e) premium bond.

11. The principal amount of a bond that is repaid at the end of term is called the par value or the:

a) back-end amount

b) face value

c) coupon rate

d) discount amount

e) Coupon

12. Stealers Wheel Software has 5.11% coupon bonds on the market with nine years to maturity. The bonds make semi-annual payments and currently sell for 107.12% of par. What is the current yield?

13. The 13.1 percent, $1,000 face value bonds of Tim McKnight, Inc., are currently selling at $846.48. What is the current yield?

14. ABC’s bonds have a 9.5 percent coupon and pay interest semi-annually. Currently, the bonds are quoted at 106.315 percent of par value. The bonds mature in 8 years. What is the yield to maturity?

15. The rate required in the market on a bond is called the:

a) call yield

b) current yield

c) yield to maturity

d) liquidity premium

e) risk premium

16. A discount bond has a yield to maturity that:

a) exceeds the coupon rate.

b) equals zero.

c) is equal to the current yield.

d) is less than the coupon rate.

e) equals the bond’s coupon rate.

17. Assume that you wish to purchase a 14-year bond that has a maturity value of $1,000 and a coupon interest rate of 7%, paid semiannually. If you require a 5.11% rate of return on this investment (YTM), what is the maximum price that you should be willing to pay for this bond? That is, solve for PV.

18. ABC Corp. issued 15-year bonds 2 years ago at a coupon rate of 10.6%. The bonds make semi-annual payments. If these bonds currently sell for 97% of par value, what is the YTM?

19. BCD’s $1,000 par value bonds currently sell for $798.40. The coupon rate is 10%, paid semi-annually. If the bonds have 5 years to maturity, what is the yield to maturity?

20. ABC has issued a bond with the following characteristics:

Par: $1,000; Time to maturity: 13 years; Coupon rate: 4%;

Assume annual coupon payments. Calculate the price of this bond if the YTM is 7.12%

21. A firm’s bonds have maturity of 10 years with a $1000 face value, an 8% semi-annual coupon, are callable in 5 years, at $1,050, and currently sells at a price of $1,100. What is the yield to call (YTC)?

22. ABC Inc., has $1,000 face value bonds outstanding. These bonds mature in 3 years, and have a 6.5 percent coupon. The current price is quoted at 98.59 percent of par value. Assume semi-annual payments. What is the yield to maturity?

If experiencing difficulty in answering bond type questions, feel free to contact our experts to coach you to have better understand the concepts.