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
Related questions
Question
You are thinking of buying IBM 6.25s20
![3.2. The ARA Corporation bonds have a coupon of 14%, pay interest semiannually, and they will mature in 7
years. Your required rate of return for such an investment is 10% annually. How much should you pay for a
$1,000 ARA Corporation bond?
For a 14% bond, the annual interest is $140 and its semiannual value is $70. The number of semiannual periods
before maturity is 14 and the semiannual discount rate is 5% or .05. The face amount of the bond is $1000. Using
(3.1), we get,
B=C[1- (1+ r)"1.
(1+r)"
+.
14 70
2013
206
17
1000 70(1-1.05-1 1000
B = 21.05 1.05
0.05
1.0514 $1,197.97 v
1-1
PRACTICE EXERCISES:
1. The WSJ lists a bond as Acme 9s13 and the price as 89.875. If your required rate of return is 10%, would
you buy one of these bonds in 2001?
2. Bakersfield Company 8.5s26 bonds pay interest semiannually, and they are quoted in the WSJ as 90. If your
required rate of return is 10%, would you buy these bonds in
2011?
3. You are thinking of buying IBM 6.25s20 bonds, priced at 92. The bonds pay interest semiannually. If your
required rate of return is 8%, would you buy these bonds in
2011?
4. Napier Company has zero-coupon bonds maturing in 2018. The yield to maturity for these bonds is 9%. Find
the price of one of these bonds in 2001.
5. Checking the Wall Street Journal in 2001, you find that the Babbitt Co. 6s21 bonds show the price as 68.
The bonds pay interest semiannually. If your required rate of return for such bonds is 10%, would you buy
Babbitt bonds?
рay
6. The investors require 8% return on Keitel Corporation 5s2024 bonds that pay interest semiannually. Find the
price of one of these bonds in 2011.
7. Adapazari Company 7% coupon bonds pay interest semiannually. When you bought one of these bonds, it
had 11 years to maturity, and the appropriate discount rate was 9%. After one year, the discount rate on such
bonds is 8% because of the improved financial health of the company. If you sell the bond today, what would be
your capital
gain or loss?
8. Zeller Co bonds are selling at $602.50 each because the bondholders' required rate of return is 15%. The bonds
pay interest semiannually and they will mature after 10
years. Find the coupon rate of these bonds.
e53.3291684
PREPARED BY: INOCENCIO CONEJOS YURAG, JR.
Page 9 9
37.664 45 543](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcfe76811-a442-4827-8f2e-9b1d99736ed6%2Fb5eb03ad-21d2-4845-a9a5-b894d35d2317%2Ff349qqe_processed.jpeg&w=3840&q=75)
Transcribed Image Text:3.2. The ARA Corporation bonds have a coupon of 14%, pay interest semiannually, and they will mature in 7
years. Your required rate of return for such an investment is 10% annually. How much should you pay for a
$1,000 ARA Corporation bond?
For a 14% bond, the annual interest is $140 and its semiannual value is $70. The number of semiannual periods
before maturity is 14 and the semiannual discount rate is 5% or .05. The face amount of the bond is $1000. Using
(3.1), we get,
B=C[1- (1+ r)"1.
(1+r)"
+.
14 70
2013
206
17
1000 70(1-1.05-1 1000
B = 21.05 1.05
0.05
1.0514 $1,197.97 v
1-1
PRACTICE EXERCISES:
1. The WSJ lists a bond as Acme 9s13 and the price as 89.875. If your required rate of return is 10%, would
you buy one of these bonds in 2001?
2. Bakersfield Company 8.5s26 bonds pay interest semiannually, and they are quoted in the WSJ as 90. If your
required rate of return is 10%, would you buy these bonds in
2011?
3. You are thinking of buying IBM 6.25s20 bonds, priced at 92. The bonds pay interest semiannually. If your
required rate of return is 8%, would you buy these bonds in
2011?
4. Napier Company has zero-coupon bonds maturing in 2018. The yield to maturity for these bonds is 9%. Find
the price of one of these bonds in 2001.
5. Checking the Wall Street Journal in 2001, you find that the Babbitt Co. 6s21 bonds show the price as 68.
The bonds pay interest semiannually. If your required rate of return for such bonds is 10%, would you buy
Babbitt bonds?
рay
6. The investors require 8% return on Keitel Corporation 5s2024 bonds that pay interest semiannually. Find the
price of one of these bonds in 2011.
7. Adapazari Company 7% coupon bonds pay interest semiannually. When you bought one of these bonds, it
had 11 years to maturity, and the appropriate discount rate was 9%. After one year, the discount rate on such
bonds is 8% because of the improved financial health of the company. If you sell the bond today, what would be
your capital
gain or loss?
8. Zeller Co bonds are selling at $602.50 each because the bondholders' required rate of return is 15%. The bonds
pay interest semiannually and they will mature after 10
years. Find the coupon rate of these bonds.
e53.3291684
PREPARED BY: INOCENCIO CONEJOS YURAG, JR.
Page 9 9
37.664 45 543
![) You are thinking buy ng 1Bm G.25c20 bonds priced at 92. the bonds pay
in terest semi anmually if your requi red rate s
of
8%, Woul d ypu buy these bond in 2011?
nas zero-coupon bonds oraturing in 2012. The yield mata nity for these
A Napier Company
bond W golo - Fimd the price of the one these bonds in 206).
9 Checking the wall street Jour nal in 2001, you frmd that the Babbit Co. Gs21
band chow the prnce as Ce8. The bonds Pray inferest remi annudlly - If your required rote
of return for such
bonds in 100% would you buy
Babbit bon ds !](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcfe76811-a442-4827-8f2e-9b1d99736ed6%2Fb5eb03ad-21d2-4845-a9a5-b894d35d2317%2Ftgle3ut_processed.jpeg&w=3840&q=75)
Transcribed Image Text:) You are thinking buy ng 1Bm G.25c20 bonds priced at 92. the bonds pay
in terest semi anmually if your requi red rate s
of
8%, Woul d ypu buy these bond in 2011?
nas zero-coupon bonds oraturing in 2012. The yield mata nity for these
A Napier Company
bond W golo - Fimd the price of the one these bonds in 206).
9 Checking the wall street Jour nal in 2001, you frmd that the Babbit Co. Gs21
band chow the prnce as Ce8. The bonds Pray inferest remi annudlly - If your required rote
of return for such
bonds in 100% would you buy
Babbit bon ds !
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