Chapter 5 Questions V1

How to Value Bonds

5.1

a.

b.

c.

5.2

5 percent?

10 percent?

15 percent?

What is the present value of a 10-year, pure discount bond paying $$1,000 at maturity if the

appropriate interest rate is:

Microhard has issued a bond with the following characteristics:

Principal: $$1,000

Time to maturity: 20 years

Coupon rate: 8 percent, compounded semiannually

Semiannual payments

Calculate the price of this bond if the stated annual interest rate, compounded semiannually, is:

a.

8%

b.

10%

c.

6%

Consider a bond with a face value of $$1,000. The coupon payment is made semiannually and the

yield on the bond is 12% (effective annual yield). How much would you pay for the bond if

a.

b.

the coupon rate is eight percent and the remaining time to maturity is 20 years?

the coupon rate is 10 percent and the remaining time to maturity is 15 years?

5.3

5.4

5.5

Jay’s Trucking, Inc. has issued an eight percent, 20

-year bond paying interest semiannually. The

bond has a face value of $$1,000. If the yield on the bond is 10 percent (effective annual yield),

what is the price of the bond?

A bond is sold at $$923.14 (below its par value of $$1,000). The bond matures in 15 years and has a

10-percent yield, expressed as a stated annual interest rate, compounded semiannually. What is

the coupon rate on the bond if the coupon is paid semiannually? The next payment occurs six

months from today.

You have just purchased a newly-issued $$1,000 five- year Vanguard Company bond at par. This

five-year bond pays $$60 in interest semiannually. You are also considering the purchase of

another Vanguard Company bond that pays $$30 in semiannual interest payments and has six years

remaining before maturity. This bond has a face value of $$1,000.

a.

b.

c.

What is the yield on the five-year bond (expressed as an effective annual yield)?

Assume that the five-year bond and the six-year bond have the same yield. What should

you be willing to pay for the six-year bond?

How will your answer in part (

b

) change if the five-year bond pays $$40 in semiannual

interest instead of $$60? Assume that the five-year bond paying $$40 semiannually is

purchased at par.

5.6

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Bond Concepts

5.7

a.

b.

c.

5.8

5.9

a.

b.

5.10

20 years remaining to maturity and is priced at $$1,200.

10 years remaining to maturity and is priced at $$950.

a

.

b

.

What are the prices of the two bonds if the relevant market interest rate for both bonds is

10 percent?

If the market interest rate increases to 12 percent, what will be the prices of the two bonds?

If the market interest rate decreases to eight percent, what will be the prices of the two

bonds?

If the market interest rate unexpectedly increases, what would be the effect on the prices

of long- term bonds? Why?

How would a rise in the interest rate affect the general level of stock prices? Why?

Consider two bonds,

A

and

B

. The coupon rates are 10 percent and the face values are $$1,000 for

both bonds. Both bonds have annual coupons. Bond

A

has 20 years to maturity while bond

B

has

10 years to maturity.

Consider a bond paying an annual coupon of $$80 with a face value of $$1,000. Calculate the yield

to maturity if the bond has

HexCorp Inc. has two different bonds currently outstanding. Bond

A

has a face value of $$40,000

and matures in 20 years. The bond makes no payments for the first six years, pays $$2,000

semiannually for the subsequent eight years, and finally pays $$2,500 semiannually for the last six

years. Bond

B

also has a face value of $$40,000 and matures in 20 years. However, it makes no

coupon payments over the life of the bond. If the stated annual interest rate is 12 percent,

compounded semiannually,

a.

b.

what is the current price of Bond

A

?

what is the current price of Bond

B

?

5.11

a.

b.

c.

d.

e.

Bonds

ATT 9s 18

ATT 5 1/8 03

ATT 7 1/8 04

ATT 8 1/8 24

Copyright 2003, McGraw-Hill. All rights reserved.

Current Yield

?

?

?

?

Volume

10

5

193

39

Close

117

100

104 1/8

107 3/8

Net Change

+ 1/4

+ 3/4

+ 1/4

- 1/8

The closing price of the bond with the shortest time to maturity is $$1,000.

The annual coupon for the bond maturing in 2018 is $$90.00.

The price on the day before this quotation (February 9) for the AT&T bond maturing in

2024 is $$1,075 per bond contract.

The current yield on the AT&T bond maturing in 2004 is 7.125 percent.

The AT&T bond maturing in 2004 has a yield to maturity of less than 7.125 percent.

Use the following February 11, 2002 Wall Street Journal quotation for AT&T Corp. Which of the

following statement are false?

5.12

The following are selected quotations from the Wall Street Journal on Friday, April 23, 2002.

Which of the following statements about Wilson’s bond are false?

a.

b.

The bond maturing in 2003 has a yield to maturity greater than 6 3/8 percent.

The closing price of the bond with the shortest time to maturity on the day before the

quotation is $$1,003.25.

The annual coupon payment for the bond maturing in 2016 is $$75.00.

The current yield on the Wilson’s bond with the longest time to ma

turity is 7.29 percent.

None of the above.

Current Yield

?

?

?

?

Volume

76

9

39

225

Close

100 3/8

98

103 5/8

102 7/8

Net Change

- 1/8

+ 1/2

+ 1/8

- 1/8

c.

d.

e.

Bonds

WILSON 6 3/8 02

WILSON 6 3/8 03

WILSON 7 1/4 05

WILSON 7 1/2 16

The Present Value of Common Stocks

5.13

A common stock just paid an annual dividend of $$2 yesterday. The dividend is expected to grow

at eight percent annually for the next three years, after which it will grow at four percent in

perpetuity. The appropriate discount rate is 12 percent. What is the price of the stock?

5.14

Use the following February 12, 2002 Wall Street Journal quotation for Merck & Co. to answer the

next question.

52 Weeks

Yield

Vol.

Net

Hi

Low

Stock

Sym

Div

%

PE

100s

Hi

Low

Close

Change

120

80.19

Merck

MRK

1.80

?

30

195111

115.9

114.5

115

- 1.25

Which of the following statements are false?

a.

The dividend yield is approximately 1.6 percent.

b.

The closing price per share on February 10, 2002 was $$113.75.

c.

The closing price per share on February 11, 2002 was $$115.

d.

The earnings per share were about $$3.83.

5.15

Examine the following stock quote for Citigroup:

52 Weeks

Yield

Vol.

Net

Hi

Low

Stock

Sym

Div

%

PE

100s

Hi

Low

Close

Change

126.25

72.50

Citigroup

CCI

1.30

1.32

16

20925

98.4

97.8

98.13

- .13

T

he expected growth rate of Citigroup’s dividends is seven percent per year. According to the

constant-

growth dividend model, what is the stock’s required return? Assume that the annual

dividend of $$1.30 was paid yesterday.

5.16

You own $$100,000 worth of Smart Money stock. One year from now, you will receive a dividend

of $$2 per share. You will receive a $$4 dividend two years from now. You will sell the stock for

$$50 per share three years from now. Dividends are taxed at the rate of 28 percent. Assume there

is no capital gains tax. The required rate of return is 15 percent. How many shares of stock do

you own?

Copyright 2003, McGraw-Hill. All rights reserved.