Valuing Callable Bonds Assets, Inc., plans to issue $5 million of bonds with a coupon rate of 7.5 percent, a par value of $1,000, semiannual coupons, and 30 years to maturity. The current market interest rate on these bonds is 6.2 percent. In one year, the interest rate on the bonds will be either 9 percent or 6 percent with equal probability. Assume investors are risk-neutral. a) If the bonds are noncallable, what is the price of the bonds today? b) If the bonds are callable one year from today at $1,080, will their price be greater or less than the price you computed in part (a)? Why?

Valuing Callable Bonds Assets, Inc., plans to issue $5 million of bonds with a coupon rate of 7.5 percent, a par value of $1,000, semiannual coupons, and 30 years to maturity. The current market interest rate on these bonds is 6.2 percent. In one year, the interest rate on the bonds will be either 9 percent or 6 percent with equal probability. Assume investors are risk-neutral. a) If the bonds are noncallable, what is the price of the bonds today? b) If the bonds are callable one year from today at $1,080, will their price be greater or less than the price you computed in part (a)? Why?

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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Two 20-year maturity mortgage-backed bonds are issued. The first bond has a par value of $10,000 and promises to pay a 10.5 percent annual coupon, while the second is a zero coupon bond that promises to pay $10,000 (par) after 20 years, with interest accruing at 10.0 percent. At issue, bond market investors require a 12.0 percent interest rate on both bonds. Required: a. What is the initial price on each bond? Bond 1: ( IT IS NOT 8879.58 ) Bond 2: 1036.67 b. Now assume that both bonds promise interest at 10.5 percent, compounded semiannually. What will be the initial price for each bond? Bond 1: 8871.53 Bond 2: 972.22 c. If market interest rates fall to 9.5 percent at the end of the fifth year, what will be the value of each bond, assuming annual payments as in (a) (state both as a percentage of par value and actual dollar value)?
A brand has bonds on the market with 19 years to maturity, a YTM of 11.0 percent, a par value of $1,000, and a current price of $1,206.50. The bonds make semiannual payments. What must the coupon rate be on these bonds? A. 13.71% B. 13.61% C. 27.27% D. 11.28% E. 22.60%
Two 20-year maturity mortgage-backed bonds are issued. The first bond has a par value of $10,000 and promises to pay a 10.5 percent annual coupon, while the second is a zero coupon bond that promises to pay $10,000 (par) after 20 years, with interest accruing at 10.0 percent. At issue, bond market investors require a 12.0 percent interest rate on both bonds. Required: a. What is the initial price on each bond? Bond 1: ? bond 2: 1033.32 b. Now assume that both bonds promise interest at 10.5 percent, compounded semiannually. What will be the initial price for each bond? c. If market interest rates fall to 9.5 percent at the end of the fifth year, what will be the value of each bond, assuming annual payments as in (a) (state both as a percentage of par value and actual dollar value)?
Assets, Inc., plans to issue $5 million of bonds with a coupon rate of 7 percent, a par value of $1,000, semiannual coupons, and 30 years to maturity. The current market interest rate on these bonds is 6 percent. In one year, the interest rate on the bonds will be either 9 percent or 5 percent with equal probability. Assume investors are risk-neutral. a.If the bonds are noncallable, what is the price of the bonds today? b.If the bonds are callable one year from today at $1,080, will their price be greater or less than the price you computed in (a)? Why? please show all work.
Your company wants to raise $8.0 million by issuing 30-year zero-coupon bonds. If the yield to maturity on the bonds will be 5% (annual compounded APR), what total face value amount of bonds must you issue?
Last year Carson Industries issued a 10-year, 13% semiannual coupon bondat its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065and it sells for $1,200.a. What are the bond’s nominal yield to maturity and its nominal yield to call? Would aninvestor be more likely to earn the YTM or the YTC?b. What is the current yield? Is this yield affected by whether the bond is likely to be called?(Hint: Refer to footnote 6 for the definition of the current yield and to Table 7.1.)c. What is the expected capital gains (or loss) yield for the coming year? Is this yielddependent on whether the bond is expected to be called? Explain your answer.
KIC Inc. plans to issue $7.2 million of bonds with a coupon rate of 16 percent paid semiannually and 36 years to maturity. The current one-year market interest rate on these bonds is 15 percent. In one year, the interest rate on the bonds will be either 18 percent or 9 percent with equal probability. Assume investors are risk neutral. a. If the bonds are non-callable, what is the price of the bonds today? (Do not round Intermediate calculations. Enter the answer in dollars. Round the final answer to 2 decimal places. Omit $ sign in your response.) Price of the bonds $ $3,799,246.63 b. If the bonds are callable one year from today at $1,575, will their price be greater or less than the price you computed in part (a)? Greater than Less than c. If the bonds are callable one year from today at $1,575, what is the current price of the bond? (Do not round Intermediate calculations. Enter the answer in dollars. Round the final answer to 2 decimal places. Omit $ sign in your response.) Current…
Bearcat Corporation is offering bonds to the market with a coupon of 15 percent. The bonds make semiannual payments and currently have a yield to maturity of 11.78 percent. The bonds will mature in 14 years and have a face value of $1,000. What should be the current market price of each bond? O $815.67 O $1,215.85 O $652.75 О $1,218.29 O $1,150.67
Elliot Enterprises' bonds currently sell for $1,150; have an 11% coupon interest rate and a $1,000 par value, pay interest annually, and have18 years to maturity. (i) Calculate the bonds' current yield (ii) Calculate the bonds' yield to maturity (YTM). (iii) Compare the YTM calculated in part (ii) to the bonds' coupon interest rate and current yield calculated in part (i). Use a comparison of the bonds' current price and par value to explain these differences.
Airborne Airlines Inc. has a $1,000 par value bond outstanding with 20 years to maturity. The bond carries an annual interest payment of $100 and is currently selling for $900. Airborne is in a 25 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar. a. Compute the yield to maturity on the old issue and use this as the yield for the new issue. Yield on new issue :
Two 20-year maturity mortgage-backed bonds are issued. The first bond has a par value of $10,000 and promises to pay a 9.5 percent annual coupon, while the second is a zero coupon bond that promises to pay $10,000 (par) after 20 years, with interest accruing at 9.0 percent. At issue, bond market investors require a 11.0 percent interest rate on both bonds. Required: a. What is the initial price on each bond? b. Now assume that both bonds promise interest at 9.5 percent, compounded semiannually. What will be the initial price for each bond? c. If market interest rates fall to 8.5 percent at the end of the fifth year, what will be the value of each bond, assuming annual payments as in (a) (state both as a percentage of par value and actual dollar value)?
Bandon Manufacturing intends to issue callable, perpetual bonds with annual coupon payments and a par value of $1,000. The bonds are callable at $1,260. One-year interest rates are 9 percent. There is a 60 percent probability that long-term interest rates one year from today will be 10 percent, and a 40 percent probability that they will be 8 percent. Assume that if interest rates fall the bonds will be called. What coupon rate should the bonds have in order to sell at par value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Coupon rate %

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