UNIT 5 QUIZ REVIEWUNIT 5 QUIZ REVIEW

• 1. The ACME Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $50.  The market interest rate for the bonds is 10%.  What is the price of these bonds?

USE PV FUNCTION IN EXCELUSE PV FUNCTION IN EXCEL

PAR 1000 EXAMPLEMKTRATE 10%COUPON 5% $50YEARS 10PV ($692.77)FV 1000

PV#2 PROBLEMPV#2 PROBLEM

• ACE Ventures' recently issued bonds that mature in 20 years.  They have a par value of $1,000 and an annual coupon of 5%.  If the current market interest rate is 7%, at what price should the bonds sell?

PV#2 PROBLEMPV#2 PROBLEM

MKTRATE 7%COUPON 5% $50YEARS 20PV ($788.12)FV 1000TYPE 0

RATE#3 PROBLEMRATE#3 PROBLEM

• UBS Incorporated issued BBB bonds two years ago that provided a yield to maturity of 12%. 

• Long-term risk-free government bonds were yielding 9% at that time. 

• The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. 

• If the risk-free long-term government bonds are currently yielding 8%,

• then at what rate should Rollincoast expect to issue new bonds?

Risk PremiumRisk Premium

• Risk Premium=Corporate yield minus the LT Risk free Government bonds

• If Corp yield is 10% and LT Govt. rate is 5% then Risk premium is 5%

• So corporate bonds will sell at the current LT rate of bonds plus the risk premium.

• YTM= Risk Premium • + Current long term rate on Bonds.• New Yield to maturity

Risk PremiumRisk PremiumRisk Premium=Corporate yield 12%

• MINUS LT Risk free Govt bonds 9%

• Risk premium was 3%

• Now LT Risk free Govt bonds 8%

• Risk premium is half of last year 1.5%

• So it should be issued rate of 9.5%

#4Yield to maturity#4Yield to maturity

• A 10-year, $1,000 face value bond has an 8.5% annual coupon.  The bond has a current yield of 8%.  What is the bond’s yield to maturity?

• Step 1: Calculate the bond's current price from information given in the current yield.

Yield to maturityYield to maturity

• Current yield = Coupon/Price

•          0.08 = $85/Price

•         Price = ? = $1,062.50.

• If you use financial calculator by entering the following data as inputs:

• N = 10; PV = -1062.50; PMT = 85; FV = 1000; and then solve for I/YR = 7.5859%  or about 7.59%.

YTMYTM

• WHAT RATE OF INTEREST DO YOU EARN IF YOU HELD IT TO MATURUTY?

• PV..PAID $1062.50• TIME 10 YRS• FV $1000• INT PYMNT $85• IN EXCEL- CLICK ON RATE- ENTER

FV 1000PV 1062.5 ENTER AS NEGATIVETIME NPER 10INT PYMNT $85TYPE 0YTMRATE 7.59% FORMAT CELL AS % 2 DECIMAL

PLACES

#5PROBLEM PV#5PROBLEM PV

• You wish to purchase a 20-year, $1,000 face value bond that makes semiannual interest payments of $40.  If you require a 10% nominal yield to maturity, what price should you be willing to pay for the bond?

#5PROBLEM PV- COMP #5PROBLEM PV- COMP PERIODSPERIODS

• With semiannual coupon payments, you need to double the number of payments that you will receive over the twenty years.  20*2=40

• You also need to divide the annual interest in half. (YTM) 10%/2=.05

5PROBLEM PV- COMP PERIODS5PROBLEM PV- COMP PERIODS

FV 1000PV ($828.41)TIME NPER 20*2 40INT PYMNT 8% 40TYPE 0YTMRATE 10%/2 0.05

you could use the formula:VB = COUPON [{1 – 1 / (1 + iN}} / i] + FV / (1 + i)N

VB = $40 [{1 – (1 / (1 + .05)^40) }/ .05 ] + $1,000 / (1 + .05)^40

#6 #6 PV OF BONDPV OF BOND

• Rio Corporation issued 15-year, 7% annual coupon bonds at their par value of $1,000 one year ago.  Today, the on these bonds has dropped to market interest rate 6%.  What is the new price of the bonds, given that they now have 15 years to maturity?

PV OF BONDPV OF BOND

15 TIMEPYMNTINT 70 COUPON 7%

6% MARKET0 TYPE

($1,097.12) PV

#7 YTM#7 YTM

• Brown Enterprises’ bonds currently sell for $1,025.  They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000.  What is their yield to maturity

• PV=-1025• FV=1000• INT PYMNT=$80,TYPE=0,TIME=9YRS

#7 YTM-CALC RATE#7 YTM-CALC RATE

• PAID PV OF $1025• GET INT PYMT OF

$80• FV=1000• TERM 9YRS

• YTM IS 7.61%- RATE OF RETURN YOU ARE EARNING

USE RATE FUNCTION1000 FV

9 TIME$80 COUPON

7.61% MARKET YTM0 TYPE

#8 Bo#8 Bond’s Pricend’s Price

• Best Corporation's bonds have a 10-year maturity, a 10% semiannual coupon, and a par value of $1,000.  The going interest rate (rd) is 14%, based on semiannual compounding. 

• What is the bond’s price?

BoBond’s Pricend’s Price

• Par Value          $1,000.00Coupon Rate           10.00%Periods/year                   2Yrs to Mat                      10N=periods                      20Annual Rate              14.00%Periodic Rate           7.00%PMT/period                 $50PV                      ???????

BoBond’s Pricend’s Price

FV 1000TIME 10 SEMI ANNUAL 20COUPON 10% 100/2 $50MARKET 14% 14%/2 7%TYPE 0 0PV USE PV FUNCTION ($788.12)