The Mathematics of Money

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

24. A $10,000 par value zero coupon bond with 8 years to maturity sells for $5,632.12. What is the effective interest rate
    for this bond?


25. An investment fund manager bought a $25,000 par value zero coupon bond for $20,053.10. It matured 3 years later.
    What was the CAGR for this investment?

G. Bonds and Sinking Funds

26. To fund a major facilities expansion, the Fullamport Congregational Church sold 1,000 twenty-year $1,000 par
    value bonds with a semiannual coupon. The church set up a sinking fund to accumulate the bonds’ redemption
    value, which pays 5% interest. How much does the church need semiannually to meet the obligations of this bond
    issue if the bond’s interest rate is 4%?


27. The City of Winterplain issued 8,000 fi fteen-year, $1,000 par value bonds with a semiannual coupon. The city set up a
    sinking fund into which it will make semiannual payments to accumulate the bonds’ redemption value. The sinking fund
    earns 4.25%. How much money does the city need semiannually for its debt service if the bond’s interest rate is 5.35%?

H. Grab Bag

28. A $10,000 par value bond sells for $9,503.19. The coupon rate is 5%. The bond matures in 8 years. Find the current
    yield.


29. Driving home from work, you hear on the radio evening news that “bonds fell in today’s trading.” Does this mean that
    interest rates in the market rose, fell, or stayed the same?


30. A $10,000 par value bond sells for $9,503.19. The coupon rate is 5%. The bond matures in 8 years. Find the yield to
    maturity.


31. Eleven years ago, I bought a zero coupon bond with a $10,000 par value for $4,992.03. What effective interest rate
    has my investment earned?


32. Dechele and Tony are looking at buying a house. They will need to take out a mortgage to pay for the purchase. If they
    hear on the evening news that “the bond market is rising, and the trend is likely to continue for the next few months,”
    does this mean that the interest rates they are likely to see when they fi nd the house they want to buy will likely be
    higher or lower than the rates available right now?


33. Suppose this quote is listed in your morning newspaper:

CORPORATE BONDS

Company Par Coupon Maturity

Current

Yield

$ Volume

(000s) Last Price

Steron

Magnetics Corp.

$1000 5.250 12/1/21 6.517 38,055 80.559

Exercises 6.2 273