The Mathematics of Money

274 Chapter 6 Investments

a. How much would one of these bonds cost?

b. If you bought one of these bonds, what payments would you receive?

c. Is this bond selling at a premium, at a discount, or at par?

d. Cattarauqua Corp. also has another bond issue with the same maturity date but with a coupon rate of 7^1 ⁄ 2 %. Would

you expect the 7^1 ⁄ 2 % coupon bonds to sell for a higher price, a lower price, or the same price as the 5.25% coupon

bonds?

34. A $10,000 par value bond with a 7^3 ⁄ 8 % coupon is sold for $11,110.55. What is the current yield?


35. A $50,000 par value bond with a 10% coupon is sold for $12,043.19. What is the current yield?


36. Someco Inc. issued three thousand fi ve hundred $1,000 par value bonds with a 10.25% semiannual coupon rate.
    These bonds mature in 8 years. The company set up a sinking fund, paying 6%, to accumulate the redemption value of
    the bonds. Calculate the semiannual debt service required by this bond issue.

I. Additional Exercises

37. Suppose the following quote is listed in the fi nancial pages of your local newspaper:

Company Par Coupon Maturity

Current

Yield

$ Volume

(000s)

Major Localbiz

Corp.

$10,000 7.250 1/1/11 7.135 19,024

This table does not list the last price for this bond issue. Determine it for the information given.

38. As mentioned in the text of this section, a buyer must often reimburse the seller of a bond for the simple interest due for
    the period since the last interest payment during which the seller has owned the bond.

Suppose that you buy a $1,000 U.S. Treasury bond with an 8% coupon rate for $1,135.19. The last interest payment
was made 126 days ago, and in addition you are required to reimburse the seller for 56 days of interest. How much in
total will you actually pay for this bond?

6.3 Commodities, Options, and Futures Contracts

Stocks (ownership of businesses) and bonds (loans) represent the two most significant

categories of investments, but they are by no means the only way that money can be

invested. In this section we will discuss some other common types of investment, and

how these investments can be used both for investment and business management

purposes.

Commodities are goods that are bought and sold in bulk. As you might imagine, since

commodities are things that are produced and used in great quantities, the dollar volume

of commodities trading is quite large. This dollar volume is made even larger by trading

274 Chapter 6 Investments