An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.2%. Bond C pays an 11.5% annual coupon, while Bond Z is a zero coupon bond. a. Assuming that the yield to maturity of each bond remains at 8.2% over the next 4 years, calculate the price of the bonds at each of the following years to maturity:

$$\begin{matrix} \text{Years to Maturity} & \text{Price of Bond C} & \text{Price of Bond Z}\\ \text{4} & \text{ } & \text{ }\\ \text{3} & \text{ } & \text{ }\\ \text{2} & \text{ } & \text{ }\\ \text{1} & \text{ } & \text{ }\\ \text{0} & \text{ } & \text{ }\\ \end{matrix}$$

b. Plot the time path of prices for each bond.

An investor purchased the following 5 bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 7%.What is the percentage change in price for each bond after the decline in interest rates? Fill in the following table:$ $$ \begin{matrix} \text{Bond} & \text{Price @8\\%} & \text{Price @7\\%} & \text{Percentage Change}\\ \text{10-year, 10\\% annual coupon}\\ \text{10-year zero}\\ \text{5-year zero}\\ \text{30-year zero}\\ \text{\$ 100 perpetuity}\\ \end{matrix} $$ $

Nesmith Corporation’s outstanding bonds have a $1,000 par value, an 8% semiannual coupon, 14 years to maturity, and an 11% YTM. What is the bond’s price?

A bond has a $1,000 par value, 12 years to maturity, and an 8% annual coupon and sells for$980. a. What is its yield to maturity (YTM)? b. Assume that the yield to maturity remains constant for the next three years. What will the price be 3 years from today?

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$910.30. The capital gains yield last year was −8.97%. a. What is the yield to maturity? b. For the coming year, what are the expected current and capital gains yields? c. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?

Madsen Motors’s bonds have 23 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 11%. What is the bond’s current market price?

Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is$1,185. The bonds may be called in 5 years at 109% of face value (Call price=$1,090). a. What is the yield to maturity? b. What is the yield to call if they are called in 5 years? c. Which yield might investors expect to earn on these bonds? Why? d. The bond’s indenture indicates that the call provision gives the firm the right to call the bonds at the end of each year beginning in Year 5. In Year 5, the bonds may be called at 109% of face value; but in each of the next 4 years, the call percentage will decline by 1%.Thus, in Year 6, they may be called at 108% of face value; in Year 7, they may be called at 107% of face value; and so forth. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firmto call the bonds?

A 7% semiannual coupon bond matures in 4 years. The bond has a face value of $1,000 and a current yield of 7.5401%. What are the bond’s price and YTM?

Seven years ago the Templeton Company issued 20-year bonds with an 11% annual coupon rate at their $1,000 par value. The bonds had a 7.5% call premium,with 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Explain why the investor should or should not be happy that Templeton called them.

It is now January 1, 2016, and you are considering the purchase of an outstanding bond that was issued on January 1, 2014. It has an 8% annual coupon and had a 30-year original maturity. (It matures on December 31, 2043.) There is 5 years of call protection (until December 31, 2018), after which time it can be called at 108—that is, at 108% of par, or $1,080. Interest rates have declined since it was issued, and it is now selling at 119.12%of par, or$1.191.20. a. What is the yield to maturity? What is the yield to call? b. If you bought this bond, which return would you actually earn? Explain your reasoning. c. Suppose the bond had been selling at a discount rather than a premium.Would the yield to maturity have been the most likely return, or would the yield to call have been most likely?

A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows:

$$\begin{matrix} \text{ } & \text{0} & \text{1} & \text{2} & \text{3} & \text{4} & \text{5}\\ \text{Project A} & \text{-\$ 30.000} & \text{\$ 10.000} & \text{\$ 10.000} & \text{\$ 10.000} & \text{\$ 10.000} & \text{\$ 10.000}\\ \text{Project B} & \text{-\$ 90.000} & \text{\$ 28.000} & \text{\$ 28.000} & \text{\$ 28.000} & \text{\$ 28.000} & \text{\$ 28.000}\\ \end{matrix}$$

a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. b. Assuming the projects are independent, which one(s) would you recommend? c. If the projects are mutually exclusive, which would you recommend? d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?

An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. If the real risk-free rate is 5% and inflation is expected to be 18% each of the next 4 years, what is the yield on a 4-year security with no maturity, default, or liquidity risk?

Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds: Bond A has a 7% annual coupon, matures in 12 years, and has a $1,000 face value. Bond B has a 9% annual coupon, matures in 12 years, and has a$1,000 face value. Bond C has an 11% annual coupon, matures in 12 years, and has a $1,000 face value. Each bond has a yield to maturity of 9%. a. Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, at a discount, or at par. b. Calculate the price of each of the three bonds. c. Calculate the current yield for each of the three bonds. d. If the yield to maturity for each bond remains at 9%, what will be the price of each bond 1 year from now? What is the expected capital gains yield for each bond? What is the expected total return for each bond?

Last year Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of$1,065 and it sells for $1,200. a. What are the bond’s nominal yield to maturity and its nominal yield to call? Would an investor be more likely to earn the YTM or the YTC? b. What is the current yield? Is this yield affected by whether the bond is likely to be called? c. What is the expected capital gains (or loss) yield for the coming year? Is this yield dependent on whether the bond is expected to be called? Explain your answer.