Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe

CHAPTER5
BOND VALUATION
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1. Valuing Bonds What is the price of a 15-year, zero coupon bond paying $1,000 at maturity, assuming
semiannual compounding, if the YTM is:
a. 6 percent?
b. 8 percent?
c. 10 percent?
2. Valuing Bonds Microhard has issued a bond with the following characteristics:
Par: $1,000
Time to maturity: 20 years
Coupon rate: 7 percent
Semiannual payments
Calculate the price of this bond if the YTM is:
a. 7 percent
b. 9 percent
c. 5 percent
3. Bond Yields Watters Umbrella Corp. issued 15-year bonds 2 years ago at a coupon rate of 5.9 percent.
The bonds make semiannual payments. If these bonds currently sell for105 percent of par value, what is
the YTM?
4. Bond Yields A Japanese company has a bond outstanding that sells for 106 percentof its ¥100,000 par
value. The bond has a coupon rate of 2.8 percent paid annually andmatures in 21 years. What is the yield
to maturity of this bond?
5. Zero Coupon Bonds You find a zero coupon bond with a par value of $10,000 and17 years to maturity. If
the yield to maturity on this bond is 4.9 percent, what is the dollarprice of the bond?Assume semiannual
compounding periods.
6. Valuing Bonds Yan Yan Corp. has a $2,000 par value bond outstanding with a couponrate of 4.9 percent
paid semiannually and 13 years to maturity. The yield to maturity ofthe bond is 3.8 percent. What is the
dollar price of the bond?
7. Valuing Bonds Union Local School District has bonds outstanding with a couponrate of 3.7 percent paid
semiannually and 16 years to maturity. The yield to maturityon these bonds is 3.9 percent, and the bonds
have a par value of $5,000. What is thedollar price of the bond?
Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe

8. Zero Coupon Bonds You buy a zero coupon bond at the beginning of the year that has a face value of
$1,000, a YTM of 6.3 percent, and 25 years to maturity. If you hold the bond for the entire year, how much
in interest income will you have to declare on your tax return? Assume semiannual compounding.
9. Bond Yields Hacker Software has 6.2 percent coupon bonds on the market with9 years to maturity. The
bonds make semiannual payments and currently sell for104 percent of par. What is the current yield on
the bonds? The YTM? The effectiveannual yield?
10. Bond Yields RAK Co. wants to issue new 20-year bonds for some much-needed expansion projects. The
company currently has 6.4 percent coupon bonds on the market that sell for $1,063, make semiannual
payments, and mature in 20 years. What coupon rate should the company set on its new bonds if it wants
them to sell at par?
11. Finding the Bond Maturity Erna Corp. has 9 percent coupon bonds making annual payments with a
YTM of 7.81 percent. The current yield on these bonds is 8.42 percent.How many years do these bonds
have left until they mature?
12. Finding the Maturity You’ve just found a 10 percent coupon bond on the market that sells for par
value. What is the maturity on this bond?
13. Zero Coupon Bonds Suppose your company needs to raise $50 million and you want to issue 30-year
bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you’re
evaluating two issue alternatives: A semiannual coupon bond with a 6 percent coupon rate and a zero
coupon bond. Your company’s tax rate is 35 percent.
a. How many of the coupon bonds would you need to issue to raise the $50 million? How many of the
zeroes would you need to issue?
b. In 30 years, what will your company’s repayment be if you issue the coupon bonds?What if you issue the
zeroes?
c. Based on your answers in (a) and (b), why would you ever want to issue the zeroes?To answer, calculate
the firm’s aftertax cash outflows for the first year under the twodifferentscenarios. Assume the IRS
amortization rules apply for the zero coupon bonds.
14. Valuing Bonds The Frush Corporation has two different bonds currently outstanding.Bond M has a face
value of $30,000 and matures in 20 years. The bond makes no paymentsfor the first six years, then pays
$800 every six months over the subsequent eight years, andfinally pays $1,000 every six months over the
last six years. Bond N also has a face value of$30,000 and a maturity of 20 years; it makes no coupon
payments over the life of the bond.If the required return on both these bonds is 6.4 percent compounded
semiannually, what isthe current price of Bond M? Of Bond N?