Bonds

Need to know Need to know � Everything, although the likelihood of yield-to-call being on the exam is low. This chapter develops the valuation techniques of fixed income securities. Bonds are valued just like an ordinary annuity. The most difficult part of this chapter is the terminology and learning the interrelationships between the various bond components. The most important relationship is that If the market price decreases, this implies that the yield to maturity has increased, and this is often expressed as rate up, price down. Also, since most bonds make coupon payments twice per year, make sure you can compute the price and yield to maturity on semiannual coupon bonds.

A minor note is that the Price (Present Value) always has a sign (+/-) opposite of the Par (Future Value=1000) and Coupon (Payment) in calculations.

Questions:

1. If its yield to maturity is less than its coupon rate, a bond will sell at a ________, and increases in market interest rates will ________.

a. discount (i.e. less than par value), decrease this discount.

b. discount (i.e. less than par value), increase this discount.

c. premium (i.e. greater than par value), decrease this premium.

d. premium (i.e. greater than par value), increase this premium.

e. none of the above.

2. The __________ the time to maturity for a bond, the ___________ is its price change in response to a given change in interest rates.

a. Longer; smaller

b. Longer; greater

c. The relationship between the time to maturity and price sensitivity of bonds depends on how stock prices change upon a change in interest rates.

d. The relationship between the time to maturity and price sensitivity of bonds depends on how the par value of the bond changes upon a change in interest rates.

e. There exists no relationship between time to maturity and price sensitivity of bonds.

Problems:

1. 12. Modata corp is planning on raising $10,000,000 in funds by issuing zero coupon, $1,000 par value bonds with a 20 year maturity. Assuming that Modata is able to issue these bonds at cost of debt of 10%, how many bonds must they issue?

a. 10,000

b. 28,291

c. 67,277

d. 8,291

e.none of the above is within 10 bonds of the correct a answer.

2. A firm issued 30-year $1,000 par value bonds ten years ago at par. At that time, the market rate for such bonds was 9%. Today these bonds are selling for $1,100. Coupon is paid annually. What is the market interest for these bonds today?