1. Determine the value of a $1,000 denomination Bell South bond with a 7 percent coupon rate maturing in 20 years for an investor whose required rate of return is:

The Price of the bond is equal to the present value of all future payments which includes the coupon payments (an annuity) as well as the Face value.

Price =

  1. 8 percent

Price =

= $901.82

  1. 7 percent

Price =

= $1,000

  1. 5 percent

Price =

= $1,249.24


  1. Consider Allied Signal Corporation’s 9 percent bonds that mature on June 1, 2010. Assume that the interest on these bonds is paid and compounded annually. Determine the value of a $1,000 denomination Allied Signal Corporation bond as of June 1, 2004, to an investor who holds the bond until maturity and whose required rate of return is:

Please see the attached excel sheet for calculations

  1. 7 percent

$1,137.04

  1. 9 percent

$1,039.25

  1. 11 percent

$952.41

  1. What would be the value of the Allied Signal Corporation bonds at an 8 percent required rate of return if the interest were paid and compounded semiannually?

$1,087.99

3.Southern Bell has issued 4 3/8 percent bonds that mature on August 1, 2011. Assume that interest is paid and compounded annually. Determine the yield to maturity if an investor purchases a $1,000 denomination bond for $853.75 on August 1, 2004.

7.10%

Please see the attached excel sheet

5.Consider the Allied Signal Corporation zero compound money multiplier notes of 2008. The bonds were issued on July 1, 1990 for $100. Interest is paid every July 1 and the bond mature on July 1, 2008. Determine the yield to maturity if the bonds are purchased at the:

  1. Issue price in 1990

13.7%

  1. Market price as of July 1, 2004, of $750

7.5%

  1. Explain why the returns calculated in (a) and (b) are different.

The returns are different because the general level of interest rates declined; causing bond prices to rise and yields to fall.

6.If you purchase have a zero coupon bond today for $225 and it matures at $1,000 in 11 years, what rate of return will you earn on that bond (to the nearest 10th of 1 percent)?

14.52%

Please see the attached excel sheet
8.AT&T Corporation has several issues of bonds outstanding. One of the outstanding bonds has a 5 percent coupon and matures in 2004. The bonds mature on April 1 in the maturity year. Suppose an investor bought this bond on April 1, 1999, and assume interest is paid annually on April 1. Calculate the yield to maturity assuming the investor buys the bond at the following price, as quoted in the financial press:

  1. 100

5.13%

  1. 90

7.6%

  1. 105

4%

11. The following bond quotations are taken from the Wall Street Journal dated Friday, September 5, 2003:
CompanyCouponMaturity& nbsp;Last Price Yield
International Paper (IP)6.750Sep 01, 2011 108.1985.468
Sara Lee (SLE)3.785 Jun 15, 201389,7005.235
Wells Fargo (WFC)7.250 Aug 24, 2005109.6452.191
General Motors (GM)7.125 Jul 15, 2013 101.2016.952
Lincoln National (LNC)6.200 Dec 15, 2011105.9035.307
a.Explain why the International Paper bond is selling at a premium but the Sara Lee is selling at a discount.

This is because the International Paper Bond is offering a higher Coupon Rate than Sara Lee’s.

b.Why is the yield (yield to maturity) on the General Motors bond so much higher than the yield on the Sara Lee bond?

GM bond has a higher YTM than SLE since the coupon payments of GM are much higher than SLE’s. The YTM could also be higher because GM bonds have a higher credit risk than SLE’s.

c.Why is the yield (yield to maturity) on the Wells Fargo Bank bond so much less than the yield on the Lincoln National Corp. bond?

This is because Wells Fargo’s bond has a higher price than Lincoln National Corp.; this is in addition to the fact that Lincoln’s has a longer time to maturity.