Questions and Problems

Basic

(Questions 1-14)

1. Interpreting Bond Yields Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond now? The YTM?

2. Interpreting Bond Yields Suppose you buy a 7 percent coupon, 20-year bond today when it's first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? Why?

3. Bond Prices WMS, Inc., has 7 percent coupon bonds on the market that have 10 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 9 percent, what is the current bond price?

4. Bond Yields Finley Co. has 10 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $1,075.25, what is its YTM?

5. Coupon Rates Mustaine Enterprises has bonds on the market making annual payments, with 13 years to maturity, and selling for $850. At this price, the bonds yield 7.4 percent. What must the coupon rate be on Mustaine's bonds?

6. Bond Prices Mullineaux Co. issued 11-year bonds one year ago at a coupon rate of 8.6 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.5 percent, what is the current bond price?

7. Bond Yields Clapper Corp. issued 12-year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent of par value, what is the YTM?

8. Coupon Rates Barely Heroes Corporation has bonds on the market with 14.5 years to maturity, a YTM of 9 percent, and a current price of $850. The bonds make semiannual payments. What must the coupon rate be on Barely Heroes' bonds?

9. Calculating Real Rates of Return If Treasury bills are currently paying 8 percent and the inflation rate is 6 percent, what is the approximate real rate of interest? The exact real rate?

10. Inflation and Nominal Returns Suppose the real rate is 3.5 percent and the inflation rate is 3 percent. What rate would you expect to see on a Treasury bill?

11. Nominal and Real Returns An investment offers a 16 percent total return over the coming year. Alan Wingspan thinks the total real return on this investment will be only 10 percent. What does Alan believe the inflation rate will be over the next year?

12. Nominal versus Real Returns Say you own an asset that had a total return last year of 13 percent. If the inflation rate last year was 4 percent, what was your real return?

13. Using Treasury Quotes Locate the Treasury issue in Figure 7.4 maturing in November 2016. Is this a note or a bond? What is its coupon rate? What is its bid price? What was the previous day's asked price?

14. Using Treasury Quotes Locate the Treasury bond in Figure 7.4 maturing in November 2026. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread?

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

III. Valuation of Future Cash Flows

7. Interest Rates and Bond Valuation

© The McGraw-Hill Companies, 2002

CHAPTER 7 Interest Rates and Bond Valuation

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