Martin Shipping Lines issued bonds 10 years ago at $1,000 per bond. The bonds had a 30-year life when issued, with semiannualpayments at the then annual rate of 13 percent. This return was in line with required returns by bondholders at that point, as describedbelow:Real rate of returnInflation premiumRisk premiumTotal return3%429%Assume that today the inflation premium is only 1 percent and is appropriately reflected in the required return (or yield to maturity) ofthe bonds.Compute the new price of the bond Use Appendix B and Appendix D (Round "PV Factor" to 3 decimal places. Do not roundintermediate calculations. Round the final answer to 2 decimal places.)New price of the bond$

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Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Ray Co.’s bonds, maturing in 3 years, pay 8 percent interest on a $1,000 face value. Interest is paid once per year. If your required rate of return is 8 percent, what is the value of the bond? Now assume that the required rate of return increased to 9%. Would you recommend investors to buy the bond? What can you conclude about the relationship between bond prices and interest rates? Assume that the modified duration of this bond is 2.60 years. If the market yield changes by 2%, how much change will there be in the bond's price in %
Refer 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 12 percent to 8 percent. a. What is the bond price at 12 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 12 percent and sold when rates were 8 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Tom Cruise Lines Incorporated issued bonds five years ago at $1,000 per bond. These bonds had a 30-year life when issued and the annual interest payment was then 14 percent. This return was in line with the required returns by bondholders at that point as described below: Real rate of return Inflation premium Risk premium Total return 3% 6 5 14% 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 25 years remaining until maturity. Compute the new price of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual. New price of the bond
Find the Macaulay duration and the modified duration of a 15-year, 7.5% corporate bond priced to yield 5.5%. According to the modified duration of this bond, how much of a price change would this bond incur if market yields rose to 6.5%? Using annual compounding, calculate the price of this bond in one year if rates do rise to 6.5%. How does this price change compare to that predicted by the modified duration? Explain the difference.
Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which is also the amount of principal to be paid at maturity. The bonds are currently selling for $520. They have 10 years to maturity, Annual interest is 12 percent ($120), paid semiannually Compute the yield to maturity. (Do not round intermediate calculation. Use a Financial calculator to arrive at the answers. Round the final answer to 2 decimal places.) Yield to maturity %
a. An 8 ½%, 25-year, $1,000 bond is presently selling at a yield-to-maturity (YTM) of 9 4%. Assuming annual interest payments, what should you pay for the bond? b. What should you pay if interest is paid semiannually? c. Instead of a 25-year bond, they decide to issue 15-year bonds with annual payments. What should you pay for this bond if the YTM is 9 4%? Explain the differences in prices changes for (3a) and (3c) in terms of maturity. d. You buy an 8%, 15-year, $1,000 bond that pays interest annually when it is selling with a YTM of 7%. Immediately after you buy the bond, the YTM increases to 9%. What was the percentage change in the price of the bond? A bond has a market price that exceeds its face value. What type of bond is this? Describe the relationship between the coupon rate and the YTM. е.

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