2.

Interpreting Bond Yields [LO2] Suppose you buy a 7 percent coupon, 20-year
bond today when it’s first issued. If interest rates suddenly rise to 15 percent, what
happens to the value of your bond? Why?

Price and yield move in opposite directions; if interest rates rise, the price of the bond
will fall. This is because the fixed coupon payments determined by the fixed coupon rate
are not as valuable when interest rates rise (the current market rate is 15%, investor could
earn 15% instead of 7%)
Hence, the price of the bond decreases

3. Bond Prices [LO2] Staind, Inc., has 7.5 percent coupon bonds on the market that
have 10 years left to maturity. The bonds make annual payments. If the YTM on
these bonds is 8.75 percent, what is the current bond price?

PB= present value of coupon + present value of face value

1,087510 −1 1000
PB= 75* 10 + = 918,89
0,0875∗1,0875 1,087510

With a face value of $1000, price of bond will be $918,89

4. Bond Yields [LO2] Ackerman Co. has 9 percent coupon bonds on the market
with nine years left to maturity. The bonds make annual payments. If the bond
currently sells for $934, what is its YTM?

90 90 90 90+ 1000
934 = 1+ 2
+ 3
+ … … .+
(1+r ) (1+r ) (1+r ) (1+r )9

R = 10,15%
 YTM = 10,15%*2 = 20,3%

5. Coupon Rates [LO2] Kiss the Sky Enterprises has bonds on the market making
annual payments, with 13 years to maturity, and selling for $1,045. At this price, the
bonds yield 7.5 percent. What must the coupon rate be on the bonds?
 C C C C +1000
1045 = 1+ 2
+ 3
+ … … .+ 13
(1,075) (1,075) (1,075) (1,075)

C = $80,5
 The coupon rate be on the bonds = 80,5 *100/1000 = 8,05%