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CHAPTER 16

Twenty-five-year B-rated bonds of Parker Optical Company were initially issued at a 12 percent yield. After 10 years, the bonds have been upgraded to Aa2. Such bonds are currently yielding 14 percent to maturity. Use Table 16-2.

Determine the price of the bonds with 15 years remaining to maturity.

PRICE OF THE BONDS =

Preston Corporation has a bond outstanding with an annual interest payment of $80, a market price of $1,230, and a maturity date in 10 years. Assume the par value of the bond is $1,000.

Find the following: (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 25 years remaining to maturity. Interest rates on similar obligations are now 10 percent. Assume Ms. Bright bought the bond three years ago when it had a price of $1,030. Further assume Ms. Bright paid 40 percent of the purchase price in cash and borrowed the rest (known as buying on margin). She used the interest payments from the bond to cover the interest costs on the loan.

a. What is the current price of the bond? Use Table 16-2. (Input your answer to 2 decimal places.)

PRICE OF THE BOND =

b. What is her dollar profit based on the bonds current price? (Do not round intermediate calculations and round your answer to 2 decimal places.)

DOLLAR PROFIT =

c. How much of the purchase price of $1,030 did Ms. Bright pay in cash? (Do not round intermediate calculations and round your answer to 2 decimal places.)

PURCHASE PRICE PAID IN CASH =

d. What is Ms. Brights percentage return on her cash investment? Divide the answer to part b by the answer to part c. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

PERCENTAGE RETURN = %

a. Coupon rate b. Current yield C-1. Approximate yield to maturity c-2. Exact yield to maturity

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