Bond Practice Problems 1.

What is the price of a $1000 par value bond that pays $50 annual interest and has 15 years to maturity if the yield on similar bonds is 8%? 2. A 10 year, $1000 par value bond pays 8% annual interest. Complete this chart: YTM 5% 7% 8% 10% 12% Price of Bond

3. What is the price of a zero coupon bond that has a par value of $1000 and 8 years to maturity if the yield on similar bonds is 5%? 4. What is the approximate yield to maturity of a 20 year, $1000 par value bond that pays $90 annual interest and has a current price of $800? 5. What is the price of a $1000 par value bond with a 6% coupon rate paid semiannually if the bond has 7 years to maturity and the YTM on similar bonds is 8% annually? 6. If a municipal bond yields 9%, what would be the comparable yield on a corporate bond if an investor pays 28% taxes? 7. What is the current yield of a bond that pays 10% annual interest and has a price of $850?

Answers 1. $743.22 2. $1232 - $1070 - $1000 - $877 - $774 3. $676.84 4. 11.11% = approx.; 11.61% = exact 5. $894.37 6. 12.5% 7. 11.76%
Practice Bond Problems - courtesy of Dr. Anand Desai

1.

You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every six months. If the yield to maturity is 10% with semiannual compounding, how much should you be willing to pay for this bond? A ten year bond with a coupon rate of 12% (payable annually) and a face value of $1,000 is selling for $1,192.50 today. What is the bonds yield to maturity? A ten year bond with an annual coupon rate of 12% payable semi-annually is selling for $1,059.75 today. Its face value is $1,000. What is the bonds yield to maturity? The coupon rate on a bond is 7 5/8 %, and the bond is selling at 95. What is the bonds current yield? A bond with a coupon rate of 12.5% per year (payable semi-annually ) has a remaining life of 7.5 years and a yield to maturity of 14%. What is the bonds current yield? Assume the bond is fairly priced. Find the current yield of the bond in the problem above assuming the yield to maturity is 9%. Two years ago, you bought a fifteen year bond at its face value of $1,000. The coupon rate on this bond is 9%, payable annually. Today (just after receiving the second annual coupon payment), the current yield on the bond is 7.5%. What is the value of the bond today?

2. 3. 4. 5.

6. 7.

Solutions 1. The value of the bond today is the sum of the present values of the coupon payments and the par value. Since the yield to maturity is 10% per year, the semi-annual yield is 5%. So PV = $60{PVOA, 5%, 20 periods} + $1,000{PVIF, 5%, 20 periods} = $1,124.62. Solve the following equation for r: $1,192.50 = $120{PVOA, r%, 10} + $1,000{PVIF, r%, 10}. By trial and error, this yields r = 9%. 3. Solve the following equation for r: $1,059.75 = $60{PVOA, r%, 20 periods} + $1,000{PVIF, r%, 20 periods}. By trial and error, this yields r = 5.50%. But this is per period, which is six months. So the annual yield to maturity is 2 x 5.50% = 11%.

2.

4. 5.

Current yield = annual coupon / current price. The annual coupon, assuming a $100 par value is 7 5/8%($100) = $7.625. And the price is $95. So current yield = $7.625/$95 = 0.0803 or 8.03%. Assume the bond has a $1,000 par value. Then the semi-annual coupon is (12.5%/2)($1,000) or $62.50. And the semi-annual discount rate is yield-to-maturity/2 or 14%/2 = 7%. So the fair price of the bond is $62.50{PVOA, 7%, 15 periods} + $1,000{PVIF, 7%, 15 periods} = $931.69. The annual coupon on this bond is 12.5%($1,000) = $125. So the current yield is $125/$931.69 = 0.13416 or 13.416%. With a yield to maturity of 9%, the semi-annual discount rate is 4.50%. The fair price of the bond is $62.50{PVOA, 4.50%, 15 periods} + $1,000{PVIF, 4.50%, 15 periods} = $1,187.94. The annual coupon on this bond is 12.5%($1,000) = $125. So the current yield is $125/$1,187.94 = 0.10522 or 10.522%.

6.

7.

The annual coupon on this bond is $90. Since current yield = annual coupon/price, then it follows that price = annual coupon/current yield = $90/0.075 = $1,200.