What would the bonds be selling at if market rates on bonds were 8%?
YOU HAVE TO SHOW YOUR WORK ON THESE PROBLEMS. For each bond pricing problem you are to write out the formula like a TVM problem (identify the type of TVM cashflow, label factor, write factor value, and solve). If I do not see this format exactly like the TVM homework, you will lose 40 points on your homework.
For all problems, unless you are told otherwise, coupons are paid semi-annually and face value of all bonds is $1,000 unless indicated otherwise.
1. Canal Electric Inc. recently issued 10-year, $1,000 par value bonds at an 8% coupon rate. Two years later similar bonds are yielding investors 6%.
a. Without any calculations, and knowing the relationship between bonds and interest rates, what would you expect for the price of the bond? Explain why.
b. At what price are the bonds selling? Hint: remember these were 10 year bonds when issued.
c. What would the bonds be selling for if market rates on bonds had risen to 12%? Calculate the new price at this rate.
d. What would the bonds be selling at if market rates on bonds were 8%? Hint: do not do any calculations to answer this question. Explain instead what the price would be and why.
2. Next month, Cashmere Energy, Inc. planned to $200 million dollars of 10-year bonds with at a face value of $2,000. The bonds were printed with a 6% coupon rate. However, Standard and Poor has just downgraded Cashmere’s bond rating due to the risk in the nuclear energy market. This means the return investors will now expect to earn on these bonds is 7%. Given that, what is the price investors would be willing to pay for these bonds AND, how much less than expected will Cashmere collect when the bonds are issued?
3. A bond from the Patchen Corp was issued with a coupon rate of 12% and has 15 years to go until it reaches maturity. Currently market rates are 10% for similar type of bonds. What is the price of this bond?
4. Refer to #3, what is the current yield on this bond (this is not the YTM)?
5. Lansing Co. issued a $1,000 face value 20-year bond 7 years ago with a 12% coupon rate. The bond is currently selling for $1,143.75. What is its YTM (yield to maturity)? To find this you have to use trial and error.
6. The Earle Apiary Co issued a 25 year bond 5 years ago. The bond currently sells for $1,343.18 and similar bonds earn 10%. What is the coupon rate for this bond?