10-5. Solution:
Essex Biochemical
Calculator Solution:
(a) 30 years to maturity
N I/Y PV PMT FV
Answer: $883.41 Bond price
(b) 20 years to maturity
N I/Y PV PMT FV
Answer: $887.44 Bond price
(c) 4 years to maturity
N I/Y PV PMT FV
Answer: $945.14 Bond price
a. 30 years to maturity
Present Value of Interest Payments
Total Present Value
10-5. (Continued)
b. 20 years to maturity
c. 4 years to maturity
6. Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 9 percent annual
interest. The current yield to maturity on such bonds in the market is
12 percent. Compute the price of the bonds for the following maturity dates:
a.30 years
b. 15 years
c. 1 year
10-6. Solution:
Kilgore Natural Gas
Calculator Solution:
(a) 30 years to maturity
N I/Y PV PMT FV
Answer: $758.34 Bond price
(b) 15 years to maturity
N I/Y PV PMT FV
Answer: $795.67 Bond price
(c) 1 year to maturity
N I/Y PV PMT FV
Answer: $973.21 Bond price
a. 30 years to maturity
Total Present Value
10-6. (Continued)
b. 15 years to maturity
c. 1 year to maturity
7. Bond maturity effect (LO10-3) Toxaway Telephone Company has a $1,000 par value
bond outstanding that pays 6 percent annual interest. If the yield to maturity is 8 percent,
and remains so over the remaining life of the bond, the bond will have the following values
over time:
Remaining
Maturity
Bond
Price
15 $795.67
10 $830.49
5 $891.86
1 $973.21
Graph the relationship in a manner similar to the bottom half of Figure 10-2. Also explain
why the pattern of price change takes place.
10-7. Solution:
Toxaway Telephone Company
6%Bond, $1,000 Par Value
Maturity (Years Remaining)
Bond Value
As the time to maturity becomes less and less, the importance of
8. Go to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume
interest rates in the market (yield to maturity) decline from 11 percent to
8 percent:
a.What is the bond price at 11 percent?
b. What is the bond price at 8 percent?
c. What would be your percentage return on investment if you bought when rates were 11
percent and sold when rates were 8 percent?
10-8. Solution:
b. Assume five years have passed and interest rates in the market have gone down to 12
percent. Now, using Table 10-2 for 15 years, what is the price of the bond?
c. What would your percentage return be if you bought the bonds when interest rates in
the market were 14 percent for 20 years and sold them 5 years later when interest rates
were 12 percent?
10-10. Solution:
a. $735.07
b. $863.78
c. Based on information in part a, you would want to own the
d. Based on information in part b, you would want to own the
12. Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems.
His broker quotes a price of $1,180. Jim is concerned that the bond might be overpriced
based on the facts involved. The $1,000 par value bond pays
14 percent interest, and it has 25 years remaining until maturity. The current yield to
maturity on similar bonds is 12 percent. Compute the new price of the bond and comment
on whether you think it is overpriced in the marketplace.
10-12. Solution:
Jim Busby – Disk Storage Systems
Calculator Solution:
(a)
N I/Y PV PMT FV
Answer: $1,156.86 New bond price
(b)
The bond has a value of $1,156.86. This indicates his broker is quoting a higher price at $1,180.
Present Value of Interest Payments
Present Value of Principal Payment at Maturity
13. Effect of yield to maturity on bond price (LO10-3) Tom Cruise Lines Inc. issued bonds
five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the
annual interest payment was then 15 percent. This return was in line with the required
returns by bondholders at that point as described next:
Real rate of return............ 4%
Inflation premium............ 6
Risk premium………………. 5
Total return…………….… 15%
Assume that five years later the inflation premium is only 3 percent and is appropriately
reflected in the required return (or yield to maturity) of the bonds.
The bonds have 20 years remaining until maturity. Compute the new price of the bond.
10-13. Solution:
Tom Cruise Lines Inc.
First compute the new required rate of return (yield to maturity).
Then, use this value to find the price of the bond.
Calculator Solution:
Present value of interest payments
N I/Y PV PMT FV
Answer: $1,224.08 New bond price
Present Value of Interest Payments
Present Value of Principal Payment at Maturity
14. Analyzing bond price changes (LO10-3) Katie Pairy Fruits Inc. has a $1,000, 20-year
bond outstanding with a nominal yield of 15 percent (coupon equals 15% × $1,000 = $150
per year). Assume that the current market-required interest rate on similar bonds is now
only 12 percent.
a. Compute the current price of the bond.
b.Find the present value of 3 percent × $1,000 (or $30) for 20 years at 12 percent. The
$30 is assumed to be an annual payment. Add this value to $1,000.
c.Explain why the answers in parts a and b are basically the same. (There is a slight
difference due to rounding in the tables.)