Principles of Managerial Finance

h. Assume that Annie buys the bond at its current closing price of 98.38 and

holds it until maturity. What will her yield to maturity(YTM) be, assuming

annual interest?

i. After evaluating all of the issues raised above, what recommendation would

you give Annie with regard to her proposed investment in the Atilier Indus-

tries bonds?

WEB EXERCISE Go to the Web site http://www.smartmoney.com. Click on Economy & Bonds. Then
click on Bond Calculator, which is located down the page under the column
Bond Tools. Read the instructions on how to use the bond calculator. Using the
bond calculator:

1. Calculate the yield to maturity(YTM) for a bond whose coupon rate is
   7.5% with maturity date of July 31, 2030, which you bought for 95.


2. What is the YTM of the above bond if you bought it for 105? For 100?


3. Change the yield % box to 8.5. What would be the price of this bond?


4. Change the yield % box to 9.5. What is this bond’s price?


5. Change the maturity date to 2006 and reset yield % to 6.5. What is the price
   of this bond?


6. Why is the price of the bond in Question 5 higher than the price of the bond
   in Question 4?


7. Explore the other bond-related resources at the site. Using Bond Market
   Update, comment on current interest rate levels and the yield curve.

CHAPTER 6 Interest Rates and Bond Valuation 305

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Remember to check the book’s Web site at

http://www.aw.com/gitman

for additional resources, including additional Web exercises.