# pays interest | Business & Finance homework help

For the bond problems, you should use your calculator functions to come up with the answers, but do not just put the bottom line answers when you submit the homework. Show the equation that is being used and what you are solving for along with the answer.

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1. A 12 year, 7.1%, \$1,000 bond that pays interest semiannually is presently selling with an Yield-to-maturity (YTM) of 5.7%. What is the price of the bond, and what kind of bond is this?

2. A 3 year, 6%, \$1,000 bond that pays interest annually is currently selling with a YTM of 5%. Compute the Duration of this bond and explain what the Duration measure is primarily used for.

3. You buy a 30 year, \$1,000 zero coupon bond that is selling at a YTM of 6% (the 6% is the Bond Equivalent Yield – in other words the Annual Percentage Rate is 6% compounded semiannually, or 3.0% each 6 months. Therefore use a value of 2 for m in the approximation equation.) Right after you buy the bond the YTM declines to 5%. Use the approximation relation that exists between the percentage price change and the duration of a bond to estimate the percentage change in the bond’s price due to the change in the YTM. Compute the exact percentage change for comparison purposes.

4. You buy a 6 year, 3.8%, \$1,000 bond that pays interest semiannually that is selling for \$944. You hold it for one year and then sell it (maturity now 5 years). The YTM when you sell the bond is 3.8%. What was your Holding Period Return during the year you held the bond?

5. A 23 year, 4.8%, \$1,000 bond that pays interest semiannually is selling for \$942.40. What is the YTM on this bond? Then indicate how we interpret the YTM on a bond? What is the bond’s Current Yield (not to be confused with the YTM)? Why do the YTM and CY differ for this bond?

6. A 28 year, 6.6%, \$1,000 bond that pays interest semiannually is currently selling for \$1,062. The bond is callable starting five years from today for \$1,066. Calculate the Bond’s Yield to Call and its YTM and indicate which is most relevant for an investor thinking about the bond now.

7. You buy a 4-year, 5%, 1,000 bond that is selling at a YTM of 6%. Interest is paid annually. Assuming you hold the bond until maturity and are able to reinvest the interest payments received over the life of the bond at an annual rate of 4%, what would your Realized Compound Yield be over the period you held the bond, and why does it differ from the YTM rate when you bought the bond?

8. Identify and briefly discuss the various types of risk you expose yourself to when investing in bonds. Then indicate how you would assess how much of each type of risk that a particular bond has. That is, discuss how we measure each type of risk.

9. Provide a brief explanation of what the following graph tells us.

US TREASURY YIELD CURVE

10. Consider the following corporate bond quotes, which are as of 4/11/14:

Current Fitch

Issuer Price Coupon Maturity Date YTM Yield Rating Callable

Missouri Pac 89.00 5.000% 1-Jan-2045 5.773% 5.618% BBB Yes

Tenn. Valley 109.75 4.875% 15-Jan-2048 4.323% 4.442% AAA No

Explain what the bond quotes tell us about each issue, and indicate how the two bonds compare in terms of Default Risk, Interest Rate Risk and Call Risk. For your information, these quotes come from the site:

11. You invest \$20,000 in a mutual fund that has a front-end load of 5 percent. The Net Asset Value of the fund at the time you invest is \$40. You hold the fund for one year, during which time the fund makes dividend and capital gain distributions of \$0.80 per share. At the end of the year, the Net Asset Value of the fund is \$43.20 per share. What is your percentage return on your initial investment of \$20,000 for the year?