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    Part 2 (With Problems)

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    Lucy Un
    A bond is a long-term debt instrument issued by a business or government entity to raise funds. It requires the issuer to make interest payments to holders and repay the principal at maturity. Key features include the par value, coupon interest rate, maturity date, and yield to maturity. Special types of bonds include zero-coupon bonds, floating-rate debt, and high-risk junk bonds. Call provisions allow early redemption, while sinking funds mandate periodic principal retirement. Bond valuation considers interest payments and principal as a present value of future cash flows.

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    © All Rights Reserved
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    Part 2 (With Problems)

    Uploaded by

    Lucy Un
    36 views14 pages
    A bond is a long-term debt instrument issued by a business or government entity to raise funds. It requires the issuer to make interest payments to holders and repay the principal at maturity. Key features include the par value, coupon interest rate, maturity date, and yield to maturity. Special types of bonds include zero-coupon bonds, floating-rate debt, and high-risk junk bonds. Call provisions allow early redemption, while sinking funds mandate periodic principal retirement. Bond valuation considers interest payments and principal as a present value of future cash flows.

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    Part 2 (with problems)

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    A bond is a long-term debt instrument issued by a business or government entity to raise funds. It requires the issuer to make interest payments to holders and repay the principal at maturity. Key features include the par value, coupon interest rate, maturity date, and yield to maturity. Special types of bonds include zero-coupon bonds, floating-rate debt, and high-risk junk bonds. Call provisions allow early redemption, while sinking funds mandate periodic principal retirement. Bond valuation considers interest payments and principal as a present value of future cash flows.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    36 views14 pages

    Part 2 (With Problems)

    Uploaded by

    Lucy Un
    A bond is a long-term debt instrument issued by a business or government entity to raise funds. It requires the issuer to make interest payments to holders and repay the principal at maturity. Key features include the par value, coupon interest rate, maturity date, and yield to maturity. Special types of bonds include zero-coupon bonds, floating-rate debt, and high-risk junk bonds. Call provisions allow early redemption, while sinking funds mandate periodic principal retirement. Bond valuation considers interest payments and principal as a present value of future cash flows.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 14

    Summary

     A bond is a long-term promissory note


    issued by a business or governmental
    unit. The issuer receives money in
    exchange for promising to make interest
    payments and to repay the principal on a
    specified future date.

    7-1
    Key Features of a Bond
     Par value – face amount of the bond, which
    is paid at maturity (assume $1,000).
     Coupon interest rate – stated interest rate
    (generally fixed) paid by the issuer. Multiply
    by par to get dollar payment of interest.
     Maturity date – years until the bond must
    be repaid.
     Issue date – when the bond was issued.
     Yield to maturity - rate of return earned on

    a bond held until maturity (also called the


    “promised yield”). 7-2
    Summary
     Some special types of long-term financing
    include zero coupon bonds, which pay
    no annual interest but are issued at a
    discount;
     Floating-rate debt, whose interest
    payments fluctuate with changes in the
    general level of interest rates;
     Junk bonds, which are high-risk, high-
    yield instruments issued by firms that use
    a great deal of financial leverage.
    7-3
    Summary
     A call provision gives the issuing
    corporation the right to redeem the
    bonds prior to maturity under specified
    terms, usually at a price greater than the
    maturity value.
     A firm will typically call a bond if interest
    rates fall substantially below the coupon
    rate

    7-4
    Summary
     A sinking fund is a provision that
    requires the corporation to retire a
    portion of the bond issue each year. The
    purpose of the sinking fund is to provide
    for the orderly retirement of the issue.

    7-5
    Summary
     The value of a bond is found as the
    present value of an annuity (the interest
    payments) plus the present value of a
    lump sum (the principal).

    7-6
    Problem
     Renfro Rentals has issued bonds that
    have a 10% coupon rate, payable
    semiannually. The bonds mature in 8
    years, have a face value of $1,000, and a
    yield to maturity of 8.5%. What is the
    price of the bonds?

    7-7
    Problem
     Jackson Corporation’s bonds have 12
    years remaining to maturity. Interest is
    paid annually, the bonds have a $1,000
    par value, and the coupon interest rate is
    8%. The bonds have a yield to maturity
    of 9%. What is the current market price
    of these bonds?

    7-8
    Problem
     The Pennington Corporation issued a new
    series of bonds on January 1, 2018. The
    bonds were sold at par ($1,000), had a
    12% coupon, to mature in 30 years on
    December 31, 2048. Coupon payments
    are made semiannually (on June 30 and
    December 31).

    7-9
    Problem
     a. What was the YTM on the date the
    bonds were issued?

     b. What was the price of the bonds on


    January 1, 2023 (5 years later), assuming
    that interest rates had fallen to 10%?

    7-10
    Problem
     The Garraty Company has two bond
    issues outstanding. Both bonds pay $100
    annual interest plus $1,000 at maturity.
    Bond L has a maturity of 15 years, and
    Bond S has a maturity of 1 year.

    7-11
    Problem

     What will be the value of each of these


    bonds when the going rate of interest is
    (1) 5%, (2) 8%, and (3) 12%? Assume
    that there is only one more interest
    payment to be made on Bond S.

    7-12
    Problem
     An investor has two bonds in his portfolio.
    Each bond matures in 4 years, has a face
    value of $1,000, and has a yield to maturity
    equal to 9.6%. One bond, Bond C, pays an
    annual coupon of 10%; the other bond, Bond
    Z, is a zero coupon bond. Assuming that the
    yield to maturity of each bond remains at
    9.6% over the next 4 years, what will be the
    price of each of the bonds at the following
    time periods? Fill in the following table
    7-13
    Problem

    7-14

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