November 2020 | MGMT 332 | College of Business | worldwide.erau.eduAll rights are reserved. The material contained herein is the copyright property of Embry-RiddleAeronautical University, Daytona Beach, Florida, 32114. No part of this material may bereproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical,photocopying, recording or otherwise without the prior written consent of the University.MGMT 332Corporate Finance IModule 4: Interest Rates and Bond ValuationProblem Set 4 – Interest Rates and Bond Valuation
What is the annual yield of a 7-year, 4.5% semi-annual coupon-paying bond pricedtoday at $1,235? Par is $1,000.
What is the annual yield of a 10-year, 7.25% annual coupon-paying bond priced todayat $655? Par is $1,000.
Show the cash flows and prices for the following four bonds, each with a par value of$1,000 and paying interest semi-annually:
Coupon Rate Years to Maturity Market Yield
A 2.88% 9 6.15B 2.35% 5 4.8C 3.22% 3 2.2D 0.0% 10 3.1Which of the four bonds would you prefer to hold and why? (Answer in the box provided.)
Consider a semi-annual bond with an annual coupon = 1.85%, maturity = 8years, par value = $1,000, and a market price today = 3:a. What is its yield to maturity (YTM)?b. Suppose the bond can be called at $750 at the end of year 5, what is itsyield to call?Continue to next pagePage 2 of 2
You have two bonds with the following characteristics:Characteristics Bond A Bond BCoupon 3.50% 3.00%Yield to Maturity 3.4334% 3.3320%Years to Maturity 5 7Par Value $1,000 $1,000Price $925.00 $980.00a. What are the bond durations?b. If rates rise to 3.55%, what are the new prices for each bond?
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