BONDS VALUATION

SELF TEST PROBLEM

Q.1 The Pennington Corporation issued a new series of bonds on January 1, 1978. The
bonds were sold at par (Rs. 1,000), have a 12 percent coupon, and mature in 30 years,
on December 31, 2007. Coupon payments are made semiannually (on June 30 and
December 31).

a) What was the YTM of Pennington’s bond on January 1, 1978?

b) What was the price of the bond on January 1, 1983, 5 years later, assuming that the
level of interest rates had fallen to 10 percent?
c) Find the current yield and capital gains yield on the bond on January 1, 1983, given
the price as determined in part b.
d) On July 1, 2001, Pennington's bonds sold for Rs. 916.42. What was the YTM at that
date?
e) What were the current yields and capital gains yield on July 1, 2001?
f) Now, assume that you purchased an outstanding Pennington bond on March 1,
2001, when the going rate of interest was 15.5 percent. How large a check must you
have written to complete the transaction? This is a hard question! (Hint: PVIFA7 75%,
13 = 8.0136 and PVIF7.7S%, I3 = 0.3789.)

PROBLEMS

Q.2 Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually,
the bonds have a Rs. 1,000 par value, and the coupon interest rate is 8 percent. The
bonds have a yield to maturity of 9 percent. What is the current market price of these
bonds?
Q.3 Wilson Wonders’ bonds have 12 years remaining to maturity. Interest is paid annually,
the bonds have a Rs. 1,000 par value, and the coupon interest rate is 10 percent. The
bonds sell at a price of Rs. 850. What is their yield to maturity?
Q.4 Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of
Rs. 1,000 and an 8 percent coupon rate, paid semiannually. The price of the bonds is
Rs. 1,100. The bonds are callable in 5 years at a call price of Rs. 1,050. What is the
yield to maturity? What is the yield to call?

Q.5 Heath Foods’ bonds have 7 years remaining to maturity. The bonds have a face value of
Rs. 1,000 and a yield to maturity of 8 percent. They pay interest annually and have a 9
percent coupon rate. What is their current yield?
Q.6 N Corporation has issued bonds that have a 9 percent coupon rate, payable semiannu-
ally. The bonds mature in 8 years, have a face value of Rs. 1,000, and a yield to maturity
of 8.5 percent. What is the price of the bonds?

Q.7 The Heymans Company’s bonds have 4 years remaining to maturity. Interest is paid
annually; the bonds have a Rs. 1,000 par value; and the coupon interest rate is 9
percent,
a) What is the yield to maturity at a current market price of (1) Rs. 829 or (2) Rs.
1,104?
b) Would you pay Rs. 829 for one of these bonds if you thought that the appropriate
rate of interest was 12 percent—that is, if kd = 12 %? Explain your answer.
Q.8 A 10-year 12 percent semiannual coupon bond, with a par value of Rs. 1,000, may be
called in 4 years at a call price of Rs. 1,060. The bond sells for Rs. 1,100. (Assume that
the bond has just been issued)

a) What is the bond’s yield to maturity?

b) What is the bond’s current yield?
c) What is the bond’s capital gain or loss yield?
d) What is the bond’s yield to call?

Q.9 You just purchased a bond which matures in 5 years. The bond has a face value of Rs.
1,000, and has an 8 percent annual coupon. The bond has a current yield of 8.21
percent. What is the bond’s yield to maturity?

Q.10 A bond which matures in 7 years sells for Rs. 1,020. The bond has a face value of Rs.
1,000 and a yield to maturity of 10.5883 percent. The bond pays coupons semiannually.
What is the bond’s current yield?