Problem Set on Bond Valuation

1. Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8 percent. The bonds have a yield to maturity of 9 percent. What is the current market price of these bonds?

2. Nungesser Corporation has issued bonds that have a 9 percent coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 9 percent. What is the price of the bonds?

3. The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S a maturity of 1 year (that is, there is only one more interest payment to be made on Bond S).

a. What will be the value of each of these bonds when the going rate of interest is (1) 5 percent, (2) 8 percent, and (3) 12 percent?

b.   Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1-year)?

4. The Heyman  Company’s bonds have 4 years remaining to maturity. Interest is paid annually; the bonds have a $1,000 par value; and the coupon interest rate is 9 percent.

a. What is the yield to maturity at a current market price of (1) $829 and (2) $1,104?

b. Would you pay $829 for one of these bonds if you thought that the appropriate rate of interest was 12 percent (that is, if r_d=12%)? Explain your answer.