Solutions to Chapter 6
Valuing Bonds
1. The bond pays a coupon of 5.25%, which means annual interest is $52.50. The bond is
selling for 130.4531 = $1,304.531. Therefore, the current yield is $52.50/$1,304.531= 4.02%.
2. a. Coupon rate = 6%, which remains unchanged. The coupon payments are fixed at
b. When the market yield increases, the bond price will fall. The cash flows are
c. At a lower price, the bond’s yield to maturity will be higher. The higher yield to
d. Current yield = coupon rate/bond price
3. When the bond is selling at a discount, $970 in this case, the yield to maturity is greater
4.
a. Coupon payment = 0.08 $1,000 = $80
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b. Since the bond is selling at a premium, the YTM must be below the coupon rate of
5.
a.
1000×.08=80
b.
15.065,1
)07.1(
000,1$
)07.(107.
1
07.
1
$80Price
99


c.
03.136,1
)06.1(
000,1$
)06.(106.
1
06.
1
$80Price
99


The price will rise by 70.88.
d.
More. The current yield exceeds the yield to maturity on the bond because the bond is selling at
Est time: 01–05
Bond valuaon
6. a. Current yield = coupon/price = $80/$1,100 = 0.0727 = 7.27%
b. To compute the yield to maturity, use trial and error to solve for r in the following
c. To compute the yield to maturity, use trial and error to solve for r in the following
equation:
6-2
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Education.
Est time: 01–05
Bond yields and returns
7. a. Bond 1:
Rate of return =
Bond 2:
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10. a. To compute the yield to maturity, use trial and error to solve for r in the
b. Since the bond is selling for face value, the yield to maturity = 8.000%.
c. To compute the yield to maturity, use trial and error to solve for r in the following
11. a. To compute the yield to maturity, use trial and error to solve for r in the
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
b. Since the bond is selling for face value, the semiannual yield = 4%.
12. In each case, we solve the following equation for the missing variable:
Price = $1,000/(1 + y)maturity
Price Maturity (Years) Yield to Maturity
$300.00
30.00
4.095%
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Education.
13. PV of perpetuity = coupon payment/rate of return
14. Current yield = 0.098375, so bond price can be solved from the following:
$90/price = 0.098375 price = $914.87
15.
99 )07.1(
000,1$
(1.07)0.07
1
0.07
1
$1,065.15
 C
6-2
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Education.