Principles of Managerial Finance

a. Calculate the yield to maturity(YTM) for each bond.

b. What relationship exists between the coupon interest rate and yield to matu-

rity and the par value and market value of a bond? Explain.

6–23 Bond valuation and yield to maturity Mark Goldsmith’s broker has shown

him two bonds. Each has a maturity of 5 years, a par value of $1,000, and a

yield to maturity of 12%. Bond A has a coupon interest rate of 6% paid annu-

ally. Bond B has a coupon interest rate of 14% paid annually.

a. Calculate the selling price for each of the bonds.

b. Mark has $20,000 to invest. Judging on the basis of the price of the bonds,

how many of either one could Mark purchase if he were to choose it over the

other? (Mark cannot really purchase a fraction of a bond, but for purposes of

this question, pretend that he can.)

c. Calculate the yearly interest income of each bond on the basis of its

coupon rate and the number of bonds that Mark could buy with his

$20,000.

d. Assume that Mark will reinvest the interest payments as they are paid (at

the end of each year) and that his rate of return on the reinvestment is

only 10%. For each bond, calculate the value of the principal payment

plus the value of Mark’s reinvestment account at the end of the

5 years.

e. Why are the two values calculated in part ddifferent? If Mark were

worried that he would earn less than the 12% yield to maturity on the

reinvested interest payments, which of these two bonds would be a better

choice?

6–24 Bond valuation—Semiannual interest Find the value of a bond maturing in 6

years, with a $1,000 par value and a coupon interest rate of 10% (5% paid

semiannually) if the required return on similar-risk bonds is 14% annual interest

(7% paid semiannually).

6–25 Bond valuation—Semiannual interest Calculate the value of each of the bonds

shown in the following table, all of which pay interest semiannually.

6–26 Bond valuation—Quarterly interest Calculate the value of a $5,000-par-value

bond paying quarterly interest at an annual coupon interest rate of 10% and

having 10 years until maturity if the required return on similar-risk bonds is cur-

rently a 12% annual rate paid quarterly.

Coupon Years to Required stated

Bond Par value interest rate maturity annual return

A $1,000 10% 12 8%

B 1,000 12 20 12

C 500 12 5 14

D 1,000 14 10 10

E 100 6 4 14

CHAPTER 6 Interest Rates and Bond Valuation 303

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