FIN
451 Week 3 Problem Set
FIN 451 Week 3 Problem Set
- Chapter 7: problem sets, numbers 8a, 8b, 24, and 28, and CFA problems, number 2>APA format is not required, but solid academic writing is expected.
- Answers should be submitted using an Excel spreadsheet in order to show all calculations, where applicable.
Chapter 8: problem sets, number 18,
and CFA problems, numbers 7, 8, and 10
- APA format is not required, but solid academic writing is expected.
- A title page is expected.
Answers should be submitted using a
Word document.
You are not required to submit this
assignment to Turnitin.
APA format is not required, but
solid academic writing is expected.
Answers should be submitted using an
Excel spreadsheet in order to show all calculations, where applicable.
15. Treasury bonds paying an 8% coupon rate with semiannual payments currently sell at par
value. What coupon rate would they have to pay in order to sell at par if they paid their
coupons annually?
20. Fill in the table below for the following zero-coupon bonds, all of which have par values
of $1,000. (LO 10-2)
Price Maturity (years) Yield to Maturity
$400 20 ?
$500 20 ?
$500 10 ?
? 10 10%
? 10 8%
$400 ? 8%
37. The yield curve is upward-sloping. Can you conclude that investors expect short-term
interest rates to rise? Why or why not?
42. The following table contains spot rates and forward rates for three years. However, the
labels got mixed up. Can you identify which row of the interest rates represents spot
rates and which one the forward rates?
3. A convertible bond has the following features:
Coupon 5.25%
Maturity June 15, 2020
Market price of bond $77.50
Market price of underlying common stock $28.00
Annual dividend $1.20
Conversion ratio 20.83 shares
Calculate the conversion premium for this bond.
5. Bonds of Zello Corporation with a par value of $1,000 sell for $960, mature in five years,
and have a 7% annual coupon rate paid semiannually. (LO 10-6)
a. Calculate the:
(1) Current yield.
(2) Yield to maturity.
(3) Horizon yield (also called realized compound return) for an investor with a threeyear
holding period and a reinvestment rate of 6% over the period. At the end of
three years the 7% coupon bonds with two years remaining will sell to yield 7%.
b. Cite one major shortcoming for each of the following fixed-income yield measures:
(1) Current yield.
(2) Yield to maturity.
(3) Horizon yield (also called realized compound return).
CHAPTER 11
9. A nine-year bond has a yield of 10% and a duration of 7.194 years. If the bond’s yield
changes by 50 basis points, what is the percentage change in the bond’s price?
15. You will be paying $10,000 a year in tuition expenses at the end of the next two years.
Bonds currently yield 8%. (LO 11-2)
a. What is the present value and duration of your obligation?
b. What maturity zero-coupon bond would immunize your obligation?
c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation.
Now suppose that rates immediately increase to 9%. What happens to your net
position, that is, to the difference between the value of the bond and that of your
tuition obligation? What if rates fall to 7%?
1. Rank the following bonds in order of descending duration. (LO 11-2)
Bond Coupon Time to Maturity Yield to Maturity
A 15% 20 years 10%
B 15 15 10
C 0 20 10
D 8 20 10
E 15 15 15
3. As part of your analysis of debt issued by Monticello Corporation, you are asked to evaluate
two specific bond issues, shown in the table below.MONTICELLO CORPORATION BOND INFORMATION
Bond A (callable) Bond B (noncallable)
Maturity 2019 2019
Coupon 11.50% 7.25%
Current price 125.75 100.00
Yield to maturity 7.70% 7.25%
Modified duration to maturity 6.20 6.80
Call date 2013 —
Call price 105 —
Yield to call 5.10% —
Modified duration to call 3.10 —
a. Using the duration and yield information in the table, compare the price and yield
behavior of the two bonds under each of the following two scenarios:
i. Strong economic recovery with rising inflation expectations.
ii. Economic recession with reduced inflation expectations.
b. Using the information in the table, calculate the projected price change for bond B if
the yield-to-maturity for this bond falls by 75 basis points.
c. Describe the shortcoming of analyzing bond A strictly to call or to maturity.
12. The following bond swaps could have been made in recent years as investors attempted
to increase the total return on their portfolio.From the information presented below, identify possible reason(s) that investors
may have made each swap. (LO 11-5)
Action Call Price YTM (%)
a. Sell Baa1 Electric Pwr. 1st mtg. 63 8% due 2017 108.24 95 7.71
Buy Baa1 Electric Pwr. 1st mtg. 23 8% due 2018 105.20 79 7.39
b. Sell Aaa Phone Co. notes 51 2% due 2018 101.50 90 7.02
Buy U.S. Treasury notes 61 2% due 2018 NC 97.15 6.78
c. Sell Aa1 Apex Bank zero coupon due 2020 NC 45 7.51
Buy Aa1 Apex Bank float rate notes due 2033 103.90 90 —
d. Sell A1 Commonwealth Oil & Gas 1st mtg. 6% due 2023 105.75 72 8.09
Buy U.S. Treasury bond 51 2% due 2029 NC 80.60 7.40
e. Sell A1 Z mart convertible deb. 3% due 2023 103.90 62 6.92
Buy A2 Lucky Ducks deb. 73 4% due 2029 109.86 75 10.43
15. Treasury bonds paying an 8% coupon rate with semiannual payments currently sell at par
value. What coupon rate would they have to pay in order to sell at par if they paid their
coupons annually?
20. Fill in the table below for the following zero-coupon bonds, all of which have par values
of $1,000. (LO 10-2)
Price Maturity (years) Yield to Maturity
$400 20 ?
$500 20 ?
$500 10 ?
? 10 10%
? 10 8%
$400 ? 8%
37. The yield curve is upward-sloping. Can you conclude that investors expect short-term
interest rates to rise? Why or why not?
42. The following table contains spot rates and forward rates for three years. However, the
labels got mixed up. Can you identify which row of the interest rates represents spot
rates and which one the forward rates?
3. A convertible bond has the following features:
Coupon 5.25%
Maturity June 15, 2020
Market price of bond $77.50
Market price of underlying common stock $28.00
Annual dividend $1.20
Conversion ratio 20.83 shares
Calculate the conversion premium for this bond.
5. Bonds of Zello Corporation with a par value of $1,000 sell for $960, mature in five years,
and have a 7% annual coupon rate paid semiannually. (LO 10-6)
a. Calculate the:
(1) Current yield.
(2) Yield to maturity.
(3) Horizon yield (also called realized compound return) for an investor with a threeyear
holding period and a reinvestment rate of 6% over the period. At the end of
three years the 7% coupon bonds with two years remaining will sell to yield 7%.
b. Cite one major shortcoming for each of the following fixed-income yield measures:
(1) Current yield.
(2) Yield to maturity.
(3) Horizon yield (also called realized compound return).
CHAPTER 11
9. A nine-year bond has a yield of 10% and a duration of 7.194 years. If the bond’s yield
changes by 50 basis points, what is the percentage change in the bond’s price?
15. You will be paying $10,000 a year in tuition expenses at the end of the next two years.
Bonds currently yield 8%. (LO 11-2)
a. What is the present value and duration of your obligation?
b. What maturity zero-coupon bond would immunize your obligation?
c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation.
Now suppose that rates immediately increase to 9%. What happens to your net
position, that is, to the difference between the value of the bond and that of your
tuition obligation? What if rates fall to 7%?
1. Rank the following bonds in order of descending duration. (LO 11-2)
Bond Coupon Time to Maturity Yield to Maturity
A 15% 20 years 10%
B 15 15 10
C 0 20 10
D 8 20 10
E 15 15 15
3. As part of your analysis of debt issued by Monticello Corporation, you are asked to evaluate
two specific bond issues, shown in the table below.MONTICELLO CORPORATION BOND INFORMATION
Bond A (callable) Bond B (noncallable)
Maturity 2019 2019
Coupon 11.50% 7.25%
Current price 125.75 100.00
Yield to maturity 7.70% 7.25%
Modified duration to maturity 6.20 6.80
Call date 2013 —
Call price 105 —
Yield to call 5.10% —
Modified duration to call 3.10 —
a. Using the duration and yield information in the table, compare the price and yield
behavior of the two bonds under each of the following two scenarios:
i. Strong economic recovery with rising inflation expectations.
ii. Economic recession with reduced inflation expectations.
b. Using the information in the table, calculate the projected price change for bond B if
the yield-to-maturity for this bond falls by 75 basis points.
c. Describe the shortcoming of analyzing bond A strictly to call or to maturity.
12. The following bond swaps could have been made in recent years as investors attempted
to increase the total return on their portfolio.From the information presented below, identify possible reason(s) that investors
may have made each swap. (LO 11-5)
Action Call Price YTM (%)
a. Sell Baa1 Electric Pwr. 1st mtg. 63 8% due 2017 108.24 95 7.71
Buy Baa1 Electric Pwr. 1st mtg. 23 8% due 2018 105.20 79 7.39
b. Sell Aaa Phone Co. notes 51 2% due 2018 101.50 90 7.02
Buy U.S. Treasury notes 61 2% due 2018 NC 97.15 6.78
c. Sell Aa1 Apex Bank zero coupon due 2020 NC 45 7.51
Buy Aa1 Apex Bank float rate notes due 2033 103.90 90 —
d. Sell A1 Commonwealth Oil & Gas 1st mtg. 6% due 2023 105.75 72 8.09
Buy U.S. Treasury bond 51 2% due 2029 NC 80.60 7.40
e. Sell A1 Z mart convertible deb. 3% due 2023 103.90 62 6.92
Buy A2 Lucky Ducks deb. 73 4% due 2029 109.86 75 10.43
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