Class Discussion – Interest Rate & Bond

1. A bond has 7 years remaining to maturity. Interest is paid annually; they have a $1000 par
value; the coupon interest rate is 6.5%; and the yield to maturity is 7.5%. What is bond’s
current market price?

2. Company A’s outstanding bonds have a $1,000 par value, an 7.0% semiannual coupon, 8
years to maturity, and an 6.2% yield to maturity. What is the bond’s price?

3. Consider the two bonds described below:

Bond I Bond II
Maturity 9 years 14 years
Coupon Rate (Paid semiannually) 6.2% 8.0%
Par Value $1,000 $1,000

If both bonds had a required return of 7.2%, what would the bonds’ prices be? Then,
describe what it means if a bond sells at a discount, a premium, and at its face amount (par
value). Are these two bonds selling at a discount, premium, or par?

4. Consider three bonds, all with a par value of $1,000:

Bond Coupon Rate Market Price

I 8% $1,050
II 9% $ 950
III 7% $1,000

What is the yield to maturity of bond III? Is the yield to maturity of bond I greater than or
less than 8%? Is the yield to maturity of bond II greater than or less than 10%?

5. A bond currently trades at RM 970 on the secondary market. The bond has 9 years until
maturity and pays an annual coupon at 7% of face value. The face value of the bond is
RM1,000. What is the yield to maturity for this bond?

6. A 6-year, $1,000 par bond has an 8.25% annual coupon and is currently yielding 7.25%. The
bond can be called in 2 years at a call price of $1,010. What is the bond’s yield to call,
assuming it will be called?

7. What is the price of a $1,000 par value bond with a 6% coupon rate paid semiannually, if the
bond is priced to yield 7% and it has 10 years to maturity? What would be the price of the
bond if the yield increases to 8%?

What is the current yield on the bond if the YTM is 8%?

8. If the market believes that 4-year securities will be yielding 6% five years from now, what
should be the current Interest rates on 9-year Treasury securities using the pure expectation
theory? The 5-year Treasury securities currently yield 5.1%.

9. Interest rates on 4-year Treasury securities are currently 6.4%. 7-year Treasury securities
yield 6.8 %. If the pure expectation is correct, what does the market believe that 3-year
securities will be yielding 4 years from now?
10. Assuming that the pure expectations theory is the correct theory of the term structure,
forecast the
(i) annual interest rate after two years; and
(ii) the 2-year interest rate after one year
(iii) the 3-year interest rate after two years

using the information of the yield curve as shown below:

Maturity 1-year 2-year 3-year 4-year 5-year
Yield 6.10% 6.25% 6.75% 6.75% 6.85%