1. Calculate the price of a five-year bond that has a coupon of 6.5 percent paid annually.

The current market rate is 5.75 percent.

Solution:
0 5.75% 1 2 3 4 5
Year
├───────┼────────┼───────┼────────┼───────┤
$65 $65 $65 $65

2. Bigbie Corp issued a five-year bond a year ago with a coupon of 8 percent. The bond
pays interest semiannually. If the yield to maturity on this bond is 9 percent, what is
the price of the bond?

Solution:
0 9% 1 2 3 4 5 6 7 8 Semiannual
Period
├───┼───┼───┼────┼───┼───┼───┼────┤
PB =? $40 $40 $40 $40 $40 $40 $40 $1,040

3. Rockwell Industries has a three-year bond outstanding that pays a 7.25 percent
coupon and is currently priced at $913.88. What is the yield to maturity of this bond?
Assume annual coupon payments.

Solution:
0 1 2 3
├───────┼────────┼───────┤
PB = $913.88 $72.50 $72.50 $1,072.50

4. Highland Corp., a U.S. company, has a five-year bond whose yield to maturity is 6.5
percent. The bond has no coupon payments. What is the price of this zero coupon
bond?
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 5. Bond price: BA Corp is issuing a 10-year bond with a coupon rate of 8 percent. The
interest rate for similar bonds is currently 6 percent. Assuming annual payments, what
is the value of the bond?
Solution:
Years to maturity = n = 10
Coupon rate = C = 8%
Annual coupon = $1,000 × 0.08 = $80
Current market rate = i = 6%
Present value of bond = PB
0 6% 1 2 3 4 5 6 10
├───┼────┼───┼───┼───┼────┼── ─────┤
$80 $80 $80 $80 $80 $80 $80
$1,000

6. Bond price: Pierre Dupont just received a cash gift from his grandfather. He plans to
invest in a five-year bond issued by Venice Corp. that pays an annual coupon of 5.5
percent. If the current market rate is 7.25 percent, what is the maximum amount Pierre
should be willing to pay for this bond?

Solution:
0 7.25% 1 2 3 4 5
├───────┼────────┼───────┼────────┼───────┤
$55 $55 $55 $55 $1,055
Coupon rate = C = 5.5%
Annual coupon = $1,000 × 0.055 = $55
Current market rate = i = 7.25%
Present value of bond = PB

7. Bond price: Knight, Inc., has issued a three-year bond that pays a coupon of 6.10
percent. Coupon payments are made semiannually. Given the market rate of interest
of 5.80 percent, what is the market value of the bond?
Solution:
Years to maturity = n = 3
Coupon rate = C = 6.1%
 Frequency of payment = m = 2
Semiannual coupon = $1,000 × (0.061/2) = $30.50
Current market rate = i = 5.8%
Present value of bond = PB
0 5.8% 1 2 3 4 5 6
├───┼────┼───┼───┼───┼────┤
$30.50 $30.50 $30.50 $30.50 $30.50 $30.50
$1,000

8. Bond price: Regatta, Inc., has seven-year bonds outstanding that pay a 12 percent
coupon rate. Investors buying these bonds today can expect to earn a yield to maturity
of 8.875 percent. What is the current value of these bonds? Assume annual coupon
payments.

Solution:
Years to maturity = n = 7
Coupon rate = C = 12%
Annual coupon = $1,000 x 0.12 = $120
Current market rate = i = 8.875%
Present value of bond = PB
0 1 2 3 4 5 6 7
├───┼────┼───┼───┼───┼────┼───┤
$120 $120 $120 $120 $120 $120 $120
$1,000

9. Bond price: You are interested in investing in a five-year bond that pays 7.8 percent
coupon with interest to be received semiannually. Your required rate of return is 8.4
percent. What is the most you would be willing to pay for this bond?

Solution:
Years to maturity = n = 5
Coupon rate = C = 7.8%
Frequency of payment = m = 2
Semi-annual coupon = $1,000 × (0.078/2) = $39.00
 Current market rate = i = 8.4%
Present value of bond = PB

0 8.4% 1 2 3 4 5 6 10
├───┼────┼───┼───┼───┼────┼── ─────┤
$39 $39 $39 $39 $39 $39 $39
$1,000

10. Zero coupon bonds: Diane Carter is interested in buying a five-year zero coupon
bond with a face value is $1,000. She understands that the market interest rate for
similar investments is 9 percent. Assume annual coupon payments. What is the
current value of this bond?

Solution:
Years to maturity = n = 5
Coupon rate = C = 0%
Current market rate = i = 9%
0 1 2 3 4 5
├───┼────┼───┼───┼───┤
$0 $0 $0 $0 $0
$1,000

11. Zero coupon bonds: Ten-year zero coupon bonds issued by the U.S. Treasury have a
face value of $1,000 and interest is compounded semiannually. If similar bonds in the
market yield 10.5 percent, what is the value of these bonds?

Solution:
Years to maturity = n = 10
Frequency of payment = m = 2
Coupon rate = C = 0%
Current market rate = i = 10.5%
0 1 2 3 4 5 6 20
├───┼────┼───┼───┼───┼────┼── ─────┤
 $0 $0 $0 $0 $0 $0 $0
$1,000

12. Zero coupon bonds: Northrop Real Estate Company is planning to fund a
development project by issuing 10-year zero coupon bonds with a face value of
$1,000. Assuming semiannual compounding, what will be the price of these bonds if
the appropriate discount rate is 14 percent?
Solution:
Years to maturity = n = 10
Coupon rate = C = 0%
Current market rate = i = 14%
Assume semiannual coupon payments.
0 1 2 3 4 5 6 20
├───┼────┼───┼───┼───┼────┼── ─────┤
$0 $0 $0 $0 $0 $0 $0
$1,000

13. Yield to maturity: Ruth Hornsby is looking to invest in a three-year bond that makes
semiannual coupon payments at a rate of 5.875 percent. If these bonds have a market
price of $981.13, what yield to maturity and effective annual yield can she expect to
earn?
Solution:
Years to maturity = n = 3
Coupon rate = C = 5.875%
Frequency of payment = m = 2
Semi-annual coupon = $1,000 × (0.05875/2) = $29.375
Yield to maturity = i
Present value of bond = PB = $981.13

14. Yield to maturity: Rudy Sandberg wants to invest in four-year bonds that are
currently priced at $868.43. These bonds have a coupon rate of 6 percent and make
semiannual coupon payments. What is the current market yield on this bond?

Solution:
 Years to maturity = n = 4
Coupon rate = C = 6%
Frequency of payment = m = 2
Semiannual coupon = $1,000 × (0.06/2) = $30
Yield to maturity = i
Present value of bond = PB = $868.43

15. Realized yield: Josh Kavern bought 10-year, 12 percent coupon bonds issued by the
U.S. Treasury three years ago at $913.44. If he sells these bonds, which have a face
value of $1,000, at the current price of $804.59, what is the realized return on these
bonds? Assume similar coupon-paying bonds make annual coupon payments.
Solution:
Purchase price of bond = $913.44
Years investment held = n = 3
Coupon rate = C = 12%
Frequency of payment = m = 1
Annual coupon = $1,000 × (0.12) = $120
Realized yield = i
Selling price of bond = PB = $804.59

16. Realized yield: Four years ago, Lisa Stills bought six-year, 5.5 percent coupon bonds
issued by the Fairways Corp. for $947.68. If she sells these bonds at the current price
of $894.52, what will be her realized yield on the bonds? Assume similar coupon-
paying bonds make annual coupon payments.

Solution:
Purchase price of bond = $947.68
Years investment held = n = 4
Coupon rate = C = 5.5%
Frequency of payment = m = 1
Annual coupon = $1,000 × (0.055) = $55
Realized yield = i
Selling price of bond = PB = $894.52
 17. The CAPM predicts that the return of MoonBucks Tea Corp. is 23.6 percent. If the risk-free rate of
return is 8 percent and the expected return on the market is 20 percent, then what is MoonBucks’ beta?

Solution:
Using the CAPM
E(RMoonBucks) = Rrf + ßMoonBucks(E[RM] – Rrf)

18. CSB, Inc., has a beta of 1.35. If the expected market return is 14.5 percent and the risk-free rate is 5.5
percent, what is the appropriate required return of CSB (using the CAPM)?

Solution:

E(RCSB) = Rrf + CSB[E(RM) - Rrf]