Exam 8: Debt Instruments and Markets

Converse Judson Industries has 9-year, $1,000 face value bonds outstanding that pay a 7 percent semiannual coupon. If your nominal annual required rate of return is 10 percent with semiannual compounding, what is the current yield on the bonds?

From the bondholder's perspective, which is riskier, a callable bond or a non-callable bond? Explain.

A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your nominal annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this bond?

Stern Design has bonds outstanding that have an 8 percent annual coupon and a face value of $1,000. The bonds will mature in 15 years, although they can be called before maturity at a call price of $1,050. The bonds have a yield to call of 6.8 percent and a yield to maturity of 7.1 percent. If interest rates remain at their current level, how long until these bonds may first be called?

Freeman Cobblers recently issued 10-year bonds at a price of $1,000. These bonds pay $50 in interest each six months. Their price has remained stable since they were issued, that is, they still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $45 in interest every six months. If both bonds have the same yield, how many new bonds must Freeman issue to raise $3,000,000?

Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $70 each six months and has 10 years before maturity. If you purchase this bond, you expect to hold it for 5 years and then to sell it in the market. You (and other investors) currently require a nominal annual rate of 16 percent, but you expect the market to require a nominal rate of only 12 percent when you sell the bond due to a general decline in interest rates. How much should you be willing to pay for this bond today?

Atlanta Power's non-callable bonds have a face value of $1,000, and pay a 9 percent semiannual coupon. In other words, there is a coupon payment of $45 every six months. Each bond has 11 years until maturity, and sells at a price of $1,070. What is the bond's nominal yield to maturity?

If a bond has a sinking fund provision, how can an issuer handle the sinking fund payments, and when will the issuer use the different methods?

Hadden Industries recently issued 10-year bonds at a price of $1,000. These bonds pay $60 in interest each six months. Their price has remained stable since they were issued, that is, they still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $40 in interest every six months. If both bonds have the same yield, how many new bonds must Hadden issue to raise $2,000,000?