Principles of Finance Corporate Bond Problems
Current Yield
1. Steve is looking at a bond that pays a 5.75% coupon and is currently selling for $1052.50. What is the current yield?

 

2. Tina is looking at a bond that has a coupon of 6 3/8 and is currently selling for $867.50. What is the current yield?

 

3. Urban is looking at a bond with a coupon of 5 1/2%. Market interest rates have dropped since the bond was issued. He would be willing to invest if he could earn a current yield of 4½%. How much would Urban be willing to pay for this bond?

 

4. Vince has his eye on a bond with a coupon of 3 7/8%. If he wants to earn a current yield of 6% on his investment how much will Vince be willing to pay for this bond?

 
5. Wilson owns a bond with a coupon of 6%. He bought it when the current yield was 7%. The current yield is now 5%. How much did he pay for the bond? What is the bond worth today? If he sold it what would his gain or loss be?

6. Xena owns a bond with an 8.5% coupon. She bought it for $1,050.00. She could sell it today based on a current yield of 8 ¼%. What was the current yield when she bought it? What price could she sell it for today? What would be her gain or loss if she sold it?

Zero Coupon Bonds

7. Zen recently bought a zero coupon bond for $245. It matures in 23 years and will pay $1,000 at maturity. What is the return that Zen will earn if he holds the bond until maturity?

 

8. Abigail is looking at a zero coupon bond that will pay $5,000 at maturity in 13 years. She will not invest unless she can earn at least 6.5% on her money. What is the most she will pay for the bond?

 

9. Billy Bob bought a zero coupon bond 2 years ago for $425. It matures in 9 years when it will pay $1,000. What will Billy Bob’s rate of return be?

 

10. Chuck wants to earn 7.5% on his zero coupon bond that matures in 19 years. It has a face value of $1,000. What would he be willing to pay today?

 
Yield to Maturity (YTM)

Problems 11- 16: Calculate two ways: First, assuming annual interest payments and second, assuming semi-annual payments (worth two points each)

11. Darcie is looking at a bond that she can buy for $809.50. It matures in 15 years and has a coupon rate of 7.5%. If she were to purchase this bond what yield to maturity would she earn?

 
12. Eunice is looking at a bond that has a 6.5% coupon and will mature in 7 years. If her goal is to earn a YTM of 8% what would she be willing to pay today to purchase the bond?

 
13. Fred receives a call from his broker who has a bond that is selling for $646.50. It matures in 11 years and has a coupon of 5.5%. If Fred where to purchase this bond, what YTM would he earn?

 

 

14. Garth wants to invest only in Investment grade bonds or better. His strategy is to hold the bond until maturity and he wants to earn a YTM of 8% or better. He is offered a bond with a coupon of 6% and 8 years to maturity at a price of $890.00. If he buys it will it meet his investment goals?

 
15. Hallie is offered a bond with a face value of $5,000. It has a coupon of 6.75% and matures in 17 years. If Hallie requires a 5% return on her investment what would she be willing to pay for the bond?

 
16. Isabella has just $750.00 to buy a bond that she likes. The bond matures in 6 years and has a coupon rate of 7%. If Isabella is able to buy the bond what rate of return will she earn?

 
Municipal Bond and Preferred Stock Problems

17. (2 points) The Davis Co. has issued a preferred stock that pays a dividend of $7.25 per year. If the stock currently sells for $96.35 per share, what is the required return?

 

 

What would be the required return if the stock price was $107.80?

 
18. A preferred stock sells for $45.65 a share and has a market return of 7.67 percent. What is the dividend amount?

 
19. ABCBank has a series of preferred stock with a par value of $100 that it just issued for $104 per share. The annual dividend is $7.35. In percentage terms what is the cost of the preferred stock to the bank?

 
20. Steve has a marginal tax rate of 35%. He can invest in a corporate bond that is trading at a YTM of 5.1% or a municipal bond that is trading at a YTM of 3.4%. Compare both bonds and determine which offers Steve the highest after tax yield.

 

 

21. Dave has a marginal tax rate of 28%. He can invest in a municipal bond trading at a YTM of 4.4 percent or a corporate bone with a YTM of 5.5 percent. Compare both bonds and determine which offers Dave the highest pre tax yield.

 

 
22. Michelle has a marginal tax rate of 31%. She can invest in a municipal bond trading at a YTM of 2.35 % or a corporate bone with a YTM of 3.41 %. Compare both bonds and determine which offers Michelle the highest pretax yield.