Problem 1
Bond Valuation and Yield
A bond has a par value of $1,000, pays $50 semiannually and has a maturity of 10 years.
If the bond earns 12% per year, what is the price of the bond?
Rate
Nper
PMT
FV
Type
PV
What is the yield to maturity for the bond?
Nper
PMT
PV
FV
Type
Rate
What would be the bond’s price if the rate earned declined to 8% per year?
Rate
Nper
PMT
FV
Type
PV
If the maturity period is reduced to 5 years and the required rate of return is 8%, what would be the price of the bond?
Rate
Nper
PMT
FV
Type
PV
What is the yield to maturity for the bond when the maturity is 5 years and the required rate of return is 8%?
Nper
PMT
PV
FV
Type
Rate
What generalizations about bond prices, interest rates and maturity periods can be made based on the calculations made above?
Problem 2
Callable Bonds
The following bonds have a par value of $1,000 and the required rate of return is 10%.
Bond XY: 5ΒΌ percent coupon, with interest paid annually for 20 years
Bond AB: 14 percent coupon, with interest paid annually for 20 years
What is each bond’s current market price?
Bond XY Bond AB
Rate
Nper
PMT
FV
Type
PV
If current interest rates are 9%, which bond would you expect to be called? Explain.
