San Diego State University Compute Bonds Current Market Price Discussion Questions

1. Madsen Motors’s bonds have 24 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 9%; and the yield to maturity is 8%. What is the bond’s current market price? Round your answer to the nearest cent.

2. Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have a 9% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond’s market price has fallen to $905.35. The capital gains yield last year was -9.465%.

1. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.
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2. For the coming year, what is the expected current yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places.
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   For the coming year, what is the expected capital gains yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places.
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3. Bond X is noncallable and has 20 years to maturity, a 8% annual coupon, and a $1,000 par value. Your required return on Bond X is 11%; if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 7%. How much should you be willing to pay for Bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.) Do not round intermediate calculations. Round your answer to the nearest cent
4. Last year Janet purchased a $1,000 face value corporate bond with an 10% annual coupon rate and a 15-year maturity. At the time of the purchase, it had an expected yield to maturity of 11.52%. If Janet sold the bond today for $1,166.98, what rate of return would she have earned for the past year? Do not round intermediate calculations. Round your answer to two decimal places.