The Mathematics of Money

Copyright © 2008, The McGraw-Hill Companies, Inc.

a. What is the selling price for one of these bonds for the rates shown in the table.

b. There was an error—the current yield was left blank. What should have been shown in that spot of the table?

C. Yield to Maturity

12. On July 1, 2007, an investment manager purchased fi ve-hundred $1,000 par value bonds with an 8.75% coupon rate
    for $467,000. The bonds mature on July 15, 2015.

a. According to this information, would you expect that the rates being offered by similar investments on the open

market carry a rate that is higher, or lower, than the coupon rate?

b. Find the current yield and the yield to maturity.

13. A $1,000 par value bond with 8 years until maturity sells for $1,017.11. The coupon rate is 6.33%.

a. Find the current yield.

b. Find the yield to maturity.

14. A bond sells at a premium. Is the yield to maturity more, less, or the same as the coupon rate? Is the yield to maturity
    more, less, or the same as the current yield?

D. The Bond Market

15. Answer the following questions, using the table below.

CORPORATE BONDS

Company Coupon Maturity

Current

Yield

$ Volume

(000s) Last Price

AnyCorp 7.000 7/9/18 9.329 5,043 75.034

SomeOtherCo 7.000 7/9/18 7.139 156,094 98.050

a. Which, if any, of these two bonds sells at a discount? Which, if any, of these two bonds sells at a premium?

b. For the information in this table, which bond issue would you say is more liquid?

c. For the information in this table, which company would you expect has a better credit rating?

d. For the information in this table, which company’s bonds would you think would be more likely to be considered

junk bonds?

16. Edgar has quite a bit of money invested in the bonds of the Port Gibson Widget Company. He hears on the morning
    business news that a major rating agency has upgraded the company’s credit rating. On the basis of this news, would
    you expect that each of the following would increase, decrease, or remain the same?

a. The market value of his bonds.

b. The current yield of his bonds.

c. The par value of his bonds.

d. The semiannual interest payments on his bonds.

Exercises 6.2 271