University of the West Indies

Department of Management Studies

MS61T Corporate Finance

Bond Valuation - Chapter 7

  1. Calculate the value of a bond that expects to mature in 12 years and has a $1,000 face value. The coupon interest rate is 8% and the investor’s required rate of return is l2%.  

  2. 7-1

  3. 7-3

  4. Enterprise Ltd., bonds have a 9% coupon rate. The interest is paid semi-annually and the bonds mature in 8 years. Their par value is $1,000. If your required rate of return is 8%, what is the value of the bond? What is the value if the interest is paid annually?

  5. You are considering a bond that is selling in the market at $1,100. The bond has a $1,000 par value, pays interest at 13%, and is scheduled to mature in 15 years. For bonds of this risk class you believe that a 14% rate of return should be required.

 a.           Calculate the value of this bond based on your required rate of return.

b.          Would you buy the bond? Why?

c.          If your required rates of return changed to 12%, how would your answer change for parts (a) and (b)?  

  1. 7-5

  2. You are willing to pay $900 for an 8%, 10-year bond ($1,000 par value) that pays interest semi-annually. What is the expected rate of return?

  3. National Steel is selling $1,000 par value bonds with a maturity period of 15 years and which pays 8% in interest annually. The market price of this bond is $1,085.

 (i)            Compute the yield to maturity.  

(ii)            Determine the value of the bond to you given your required rate of return of 10%.

(iii)         Should the bond be purchased?

  1. 7-6

  2. DOMS Ltd. bonds have a maturity value of $1,000. The bonds carry a coupon rate of 12%. Interest is paid quarterly. The bonds will mature in 5 years. If the current market price is $1,250, what is the yield to maturity?  

  3. DOMS Ltd. will also be issuing zero coupon bonds with a face value of $1,000. These bonds will mature in 10 years. Find the yield to maturity if the current market price is $490.00.  

  4. 7-2- Thatcher's Corporation's bonds will mature in 10 years. The bond's have a face value of $1,000 and an 8% coupon rate, paid semi-annually. The price of the bonds is $1,100. The bonds are callable in 5 years at a call price of $1,050. What is the yield to maturity? What is the yield to call?

  5. 7-19

  6. 7-21