PROBLEMS ON BOND VALUATION

1 Sky Enterprises has bonds on the market making annual payments with
and selling for $1045. At this price, the bond yields 7.5 per cent .What
ANS
PV
FV
RATE
NPER
COUPON PMT
COUPON RATE

1045
1000
0.075
13
$80.54
8.053788883 %

Grohl Co
issued 11 year bonds a year ago at a coupon rate
semiannual payments. If the YTM on these bonds is 7.4 perce
SOLUTION
settlement
maturity
rate
yield
redemption
frequency

1/1/2010
1/1/2020
0.069
0.074
100
2
96.51034873 % of Par

THE PRICE OF THE BOND IS $965.10

3 Ngata Corp issued 12 year bonds 2 year ago at a coupon rate of 8.4 per
semiannual payments. If the bonds currently sell for 105 percent of par
0.076747
solution

NGATA CORP
settlement
1/1/2000
maturity
1/1/2010
rate
0.084
yield
???
PRICE
105
redemption
100
frequency
2
0.076747397
THE YIELD TO MATURITY IS 7.68%

Ashes Divide Corp has bonds on the market with 14.5 years to
and a current price of $924.The bonds make semiannual paym
be on these bonds?
PV
FV
NPER
RATE
COUPON

924
1000
14.5
0.068
PMT

$59.59

COUPON RATE

5.959364

5 Suppose the real rate is 3 per cent and the inflation

expect to see on a Treasury bill?
SOLUTION
5 NOMINAL RATE INTEREST
(1+n)=(1+r)(1+i)
n=(1+r)(1+i)-1
(1.03)(1.047)-1
0.07841

6 Bond X is a premium bond making annual payments

YTM of 6 percent and has 13 years to maturity. Bond
payments. This bond pays a 6percent coupon, has a
maturity. If interest rates remain unchanged, what d
one year from now? In three years in eight years ,in

BOND X

PREMIUM BOND

SETTEMENT DATE
MATURITY DATE
COUPON
YTM
REDEM

BOND X

FREQUENCY
P0
P1
P3
P8
P12
P13

P0
P1
P3
P8
P12
P13

All else held equal, the premium over par value for a premium bond d
from par value for a discount bond declines as maturity approaches
This is called "pull to par". In both cases , the largest percentage pric

7 Both Bond Sam and Bond Dave have 9 per cent coupons, mak
priced at par value. Bond Sam has 3 years to maturity ,where
maturity .If the interest rates suddenly rise by 2 percent ,wha
price of Bond Sam ? Bond Dave? If the rates were to suddenly
would be the percentage change in the price of Bond Sam be
your answers by graphing bond prices versus YTM. What doe
interest rate risk of longer term bonds
solution

Any bond that sells at par has a YTM equal to the coupon r
on both bonds is the coupon rate , 9%. If the YTM suddenly
BOND SAM
SETTLEMENT DATE
MATURITY DATE
COUPON
YIELD
REDEMPTION
FREQUENCY
PRICE
PERCENT CHANGE

IF THE YTM SUDDENLY FALLS TO 7 PER CEN

BOND SAM
SETTLEMENT DATE
MATURITY DATE
COUPON
YIELD
REDEMPTION
FREQUENCY
PRICE
PERCENT CHANGE

ALL ELSE THE SAME, THE LONGER THE MATURITY OF

SENSITIVITY TO CHANGES IN INTEREST RATES

making annual payments with 13 years to maturity

nd yields 7.5 per cent .What must be the coupon rate

a year ago at a coupon rate of 6.9 percent. The bonds make

on these bonds is 7.4 percent, what is the current bond price?

96.5103487

o at a coupon rate of 8.4 percent. The bonds make

ly sell for 105 percent of par value, what is the YTM?

0.0767474

he market with 14.5 years to maturity, a YTM of 6.8 per cent

onds make semiannual payments. What must the coupon rate

Err:523

59.59

s 3 per cent and the inflation rate is 4.7 per cent. What rate would you
sury bill?
0.07841

settlement da
maturity 1
maturity 3
maturity 8
maturity 12
maturity 13
7.84%

nd making annual payments. The bond pays an 8 percent coupon, has a

as 13 years to maturity. Bond Y is a discount bond making annual
ys a 6percent coupon, has a YTM of 8 percent and also has 13 years to
es remain unchanged, what do you expect the price of these bonds be
hree years in eight years ,in 12 years in 13 years .Illustrate your answers by graphing bond prices

REMIUM BOND

1/1/2000
1/1/2013
0.08
0.06
100

1/1/2000
1/1/2012

1/1/2000
1/1/2010
0.06
0.08

1/1/2000
1/1/2005

1/1/2000
1/1/2001

1/1/2000
1/1/2000

1
117.705366 P0
116.767688 P1
114.720174 P3
108.424728 P8
101.886792 P12
100 P13
BONDX
1177.05366
1167.67688
1147.20174
1084.24728
1018.86792
1000

BOND Y
84.19244812
84.92784397
86.5798372
92.01457993
98.14814815
100
BOND Y
841.92
849.28
865.80
920.15
981.48
1000

par value for a premium bond declines as maturity approaches, and the discount
clines as maturity approaches
ses , the largest percentage price changes occur at the shortest maturity lengths

ave 9 per cent coupons, make semiannual payments and are

s 3 years to maturity ,whereas Bond Dave has 20 years to
ddenly rise by 2 percent ,what is the percentage change in the
f the rates were to suddenly fall by 2 percent instead, what
in the price of Bond Sam be then ?of Bond dave . Illustrate
prices versus YTM. What does this problem tell you about the

has a YTM equal to the coupon rate . Both bonds sell at par, so the initial YTM
on rate , 9%. If the YTM suddenly rises to 11 per cent
BOND DAVE
1/1/2000
1/1/2003
0.09
0.11
100
2
95.0044697
950.044697
-4.99553031

1/1/2000
1/1/2020
0.09
0.11
100
2
83.95387531
839.5387531
-16.04612469

1/1/2000
1/1/2003
1/1/2020

UDDENLY FALLS TO 7 PER CENT

BOND DAVE
1/1/2000
1/1/2003
0.09
0.07
100
2
105.328553
1053.28553
5.32855302

1/1/2000
1/1/2020
0.09
0.07
100
2
121.3550723
1213.550723
21.35507234

E LONGER THE MATURITY OF A BOND, THE GREATER IS ITS PRICE

ES IN INTEREST RATES

x
1/1/2000
1/1/2001
1/1/2003
1/1/2008
1/1/2012
1/1/2013

101.8868
105.346
112.4196
116.7677
117.7054

y
98.14815
94.84581
88.50672
84.92784
84.19245

y graphing bond prices versus time to maturity.

0.09
0.09