INTEREST RATES AND BOND VALUATION
Concepts Review and Critical Thinking Questions
1. What is the relationship between the price of a bond and it's YTM?
2. Explain why some bonds sells at a premium over par value while other bonds sells at discount. What do you know about the relationship between the coupon rate and the YTM for premium bond? What about for discount bonds? For bonds setting at par value?
3. Lycan, Inc. has 6% coupon bond on the market that have 9 years left to maturity. The bond make annual payments. If the YTM on these bond is 8%, what is the current bond price?
4. Timberlake-Jackson Wardrobe Co. has 7% coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $1,038.50, what is its YTM?
5. Merton Enterprises has bonds on the market making annual payment, within 12 years to maturity, and selling for $963. At this price, the bonds yield 7.5%. What must the coupon rate be on Merton's bonds?
6. Bond X is a premium bond making annual payments. The bond pays an 9% coupon, has a YTM of 7%, and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond pays a 7% coupon, has YTM of 9% and also has 13 years to maturity.
What are the prices if these bond today?
If interest rates remains unchanged, what do you expect the prices of these bonds to be in one year? In 3 years? In 8 years? In 12 years? In 13 years? What is going on here? Illustrate your answers by graphing bond prices versus time to maturity.