Bond Practice Problems

1. You are evaluating a 9% coupon corporate bond with a face value of $1000. The
bond matures in six years. The yield to maturity is 6.8% and the coupon is paid
annually.
a. What should be the current price of the bond?
b. Draw the timeline for this bond, showing current price, coupon payments,
face value, years to maturity and yield to maturity.

2. Suppose you are asked to analyze three bonds. Bond A matures in 1 year, Bond B
matures in 5 years, and Bond C matures in 15 years. Each of the three bonds has a
coupon rate of 6% (paid annually) and the yield to maturity is 3.8%.
a. What is the current market price for each bond?
b. Compute a new market price for Bond A, Bond B and Bond C at the following
two yields to maturity: YTM = 5% and YTM = 10%.
c. Draw a graph showing the prices of these bonds at the different yields. Put all
the bonds on the same graph, and show one line on the graph for each bond.
Put price on the y-axis and YTM on the x-axis. Make sure to clearly label your
graph so that it shows the relationship between bond prices and yields
d. Based on your graph, clearly describe the relationship between time to
maturity and the sensitivity of bond prices to rate fluctuations.

3. Consider a bond with a face value of $1,000, currently selling for $1,349.96, and
maturing in 11 years. If this bond pays coupons semiannually and its yield to
maturity is 4.03%, what is the coupon rate?

4. What is the yield to maturity of a zero coupon bond selling for $493.63, with nine
years to maturity? Assume semiannual compounding.

Financial Management 1