All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University.

MGMT 332 Corporate Finance I

Module 4: Interest Rates and Bond Valuation

Problem Set 4 – Interest Rates and Bond Valuation

1. What is the annual yield of a 5-year, 3.25% semi-annual coupon-paying bond priced today at $1,075? Par is $1,000.

2. What is the annual yield of a 15-year, 5.25% annual coupon-paying bond priced today at $799? Par is $1,000.

3. Show the cash flows and prices for the following four bonds, each with a par value of $1,000 and paying interest semi-annually:

# Coupon Rate Years to Maturity Market Yield

A 1.5% 10 4.15 B 4.4% 6 5.0 C 6.2% 5 4.2 D 0.0% 9 5.1

Which of the four bonds would you prefer to hold and why? (Answer in the box provided.)

4. Consider a semi-annual bond with an annual coupon = 3.0%, maturity = 5 years, par value = $1,000, and a market price today = $700:

a. What is its yield to maturity (YTM)? b. Suppose the bond can be called at $900 at the end of year 3, what is its

yield to call?

Continue to next page

Page 2 of 2

5. You have two (2) bonds with the following characteristics:

Characteristics Bond A Bond B

Coupon 2.0% 3.0% Yield to Maturity 4. % 4. % Years to Maturity 8 9

Par Value $1,000 $1,000 Price $845.00 $880.00

a. What are the bond durations? b. If rates rise to 5.00%, what are the new prices for each bond?