University of Tunis

Tunis Business School

Principles of Finance
Tutorial n°4: Bonds, Features and Valuation
Professor: Dr. Ridha Esghaier
(Spring 2022)

Multiple Choice Questions:

Q1. The expected rate of return on a bond if bought at its current market price and held to maturity.
a. current yield
b. yield to call
c. capital gains yield
d. yield to maturity

Q2. When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is
selling at:
a. face value.
b. a discount.
c. a premium.
d. cannot be determined without more information.

Q3. Which of the following statements is most correct?

a. If a bond’s required yield to maturity exceeds the coupon rate, the bond will sell at a premium over par.
b. All else equal, if a bond’s required yield to maturity increases, its current yield will fall.
c. All else equal, if a bond’s required yield to maturity increases, its price will fall.
d. None of the statements above is correct.

Q4. Which of the following statements is correct?

a. If a bond’s required yield to maturity exceeds its coupon rate, the bond’s current yield must also exceed its
coupon rate.
b. If a bond’s required yield to maturity exceeds its coupon rate, the bond’s price must exceed its face value.
c. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds
should sell for the same price regardless of the bond’s coupon rate.
d. None of the statements above is correct.

Q5. Which of the following statements is most correct?

a. A callable 10-year, 10 percent bond should sell at a higher price than an otherwise similar noncallable
bond.
b. two bonds have the same maturity and the same coupon rate. However, one is callable and the other
is not. The difference in prices between the bonds will be greater if the current market interest rate is
below the coupon rate than if it is above the coupon rate.
c. A call provision is valuable to investors but potentially detrimental to the firm
d. Corporate treasurers dislike issuing callable bonds because these bonds may require the company to
raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.

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Exercise n°1: Nominal Yield to maturity
A $100 face value bond has a current market price of $93.5, an 8 percent coupon rate, and 10
years remaining until maturity. Interest payments are made semiannually.
a. Before you do any calculations, decide whether the yield to maturity is above or below the
coupon rate. Why?
b. What is the semiannual yield to maturity on this bond?
c. Using your answer to Part (b), what is the bond’s annual yield to maturity?

Exercise n°2: Bond Prices and Yields-to-Maturity Based on Spot Rates

Calculate the price (per 100 of par value) and the yield- to- maturity for a four- year, 3% annual
coupon payment bond given the following two sequences of spot rates.

Exercise n°3: Fair price and Yield to maturity

A Corporation is selling a new issue of bonds to raise money. The bonds will pay a coupon rate
of 10% and will mature in 6 years. The face value of the bonds is $1,000; interest is paid semi-
annually.
The market rate of interest is currently 8% for similar bonds.
a. What is the fair price for an investor to pay for one of these bonds?
b. If you pay the current price of $1,100 for a bond, what will be your yield-to-maturity?

Exercise n°4: Yield to Maturity, Current Yield and Capital Gain

A 10-year, 12% semiannual coupon bond, with a par value of $100 sells for $110. (Assume that
the bond has just been issued.)
a. What is the bond’s yield to maturity?
b. What is the bond’s current yield?
c. What is the bond’s capital gain or loss yield?

Exercise n°5: bond pricing between 2 coupon dates

A Company issued an annual bond with these features :
Face value: $1000
Coupon rate i : 7%
Annual coupons
Issue date: July 1st, 2015
Maturity, July 1st, 2020
Compute the bond price on September 3rd, 2017 assuming that the market interest rate for that
type of bonds « rd » at this date is 9%. What is its Clean price at this date?
Note: year 2017: 365 days

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Exercise n°6: Bond value in future time periods
A 20-year, $1,000 par value bond has a 9% annual coupon. The bond currently sells for $925.
If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Exercise n°7: Determining coupon rate and bond pricing between 2 coupon dates
On January 1st, 2016 a Company’s outstanding bonds have a $100 par value and mature in 5
years. Their yield to maturity is 9% and they pay semiannual interest. Their current market price is
$85.361 (on January 1st, 2016).
1- What is the bond's annual coupon interest rate i?
2- What would be the bond’s price on October 13, 2017? (assume the YTM remains the same)
3- What is its clean price on October 13, 2017?

Exercise 8: Yield to maturity & yield to call

It is now January 1st, 2021, and you are considering the purchase of an outstanding Corporation
bond that was issued on January 1st, 2019. The bond has a 9.5% annual coupon and a 30-year
original maturity (it matures on December 31, 2048). There is a 5-year call protection (until
December 31, 2023), after which time the bond can be called at 109% of par (that is, at $1,090).
Interest rates have declined since the bond was issued, and the bond is now selling at $1165.75.
1. What is the yield to maturity in 2021 for this bond? What is its yield to call?
2. If you bought this bond, which return do you think you would actually earn? Explain your
reasoning.

Exercise 9: semiannual callable bond

A 10-year, 10% semiannual coupon bond selling for $1,135.90 can be called in 4 years for $1,050.
Par value $1000.
1. what is the bond’s yield to Maturity (YTM)?
2. Compute the yield to call (YTC) of the bond?
3. If you bought these premium bonds, would you be more likely to earn YTM or YTC?

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