Question

1. Charles Wilson bought 10-year bonds issued by Harvest Foods five years ago for $932.30. The bonds make semiannual coupon payments at a rate of 8.4 percent. If the current price of the bonds is $1,045.77, what is the yield that Charles would earn by selling the bonds today? (Round answer to 2 decimal places, e.g. 15.25%.)

2. Carla Vista 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 7.650 percent. What is the current value of these bonds? Assume annual coupon payments. (Round answer to 2 decimal places, e.g. 15.25.)

3.

The Sunland Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a rate of 9.925 percent. The current market rate for similar securities is 11.6 percent. Assume that the face value of the bond is $1,000.

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What is the current market value of one of these bonds? (Round answer to 2 decimal places, e.g. 15.25.)

Current market value

$

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What will be the bond’s price if rates in the market (i) decrease to 9.60 percent or (ii) increase to 12.6 percent? (Round answers to 2 decimal places, e.g. 15.25.)

			Bond's price
(i)	Decrease to 9.60 percent		$
(ii)	Increase to 12.6 percent		$

Answer 1

Answer to Question 1:

Face Value = $1,000
Purchase Price = $932.30
Selling Price = $1,045.77

Annual Coupon Rate = 8.40%
Semiannual Coupon Rate = 4.20%
Semiannual Coupon = 4.20% * $1,000
Semiannual Coupon = $42

Holding Period = 5 years
Semiannual Period = 10

Let Semiannual Holding Yield be i%

$932.30 = $42 * PVIFA(i%, 10) + $1,045.77 * PVIF(i%, 10)

Using financial calculator:
N = 10
PV = -932.30
PMT = 42
FV = 1045.77

I = 5.45%

Semiannual Yield = 5.45%
Annual Yield = 2 * 5.45%
Annual Yield = 10.90%

So, Charles would earned a yield of 10.90% by selling the bonds today.