240 The theory of interest EXERCISES 6.2 Types of securities 1, Find the price which should be paid for a zero coupon bond that matures for $1000 in 10 years to yield: @) 10% effective. 2b) Meellective. ©) Thus, a 10% reduction in the yield rate causes the price to increase by what percentage’? 2. A 10-year accurnulation bond with an initial par value of $1000 eams interest of 84% ‘compounded semismnually. Find the price to yield an investor 10% effective. 3. A 2G-week T-bill is bought for $9600 at issue and will mature for $10,000. Find the yield rate computed as: ‘@) A discount rae, using the typical method for counting days on aT-bill b) An annual effective rate of interest, assuming the investment period is exactly half year. 6.3 Price of a bond 4. A 10-year $100 par value bond bearing # 10% coupon rate payable semiannually and redceanble at $105 is bought 10 yield 8% convertible semiannually. Find the price. Verify that all four formulas produce the same answer, 5. Two $1000 bonds redeermable at par at the end of the same period are bought to yield 4% convertible semiannually. One bond costs $1136.78 and has a coupon rate of 5% payable semiannually. The other bond has a coupon rate of 2 1/2% payable semiannually. Find the price ofthe second bond. 6. A.$1000 bond with a coupon rate of 9% payable semiannually is redeemable after an ‘unspecified number of years at $1125. The bond is bought to yield 10% convertible semiannually. Ifthe present value of the redemption value is $225 at this yield rate, find the purchase price. 7. A.$1000 par value 2-year bond maturing at par with $100 annual coupons is purchased for $1110. If K = $450, find the base amount G.0. L. B. M4, Bonds and other securities 241 ‘An investor owns a $1000 par value 10% bond with semnigmaual coupons, The bond. ‘will mature at par at the end of 10 years. The investor decides that an 8-year bond. ‘would be preferable, Curent yield rates arc 74 convertible semiannually. The investor uses the proceeds from the sale of the 10% bond to purchase a 6% bond with semiannual coupons, maturing al par at the end of 8 years, Find the par value ot the 8- year bond, Answer to the nearest dolla. ‘An nyear $1000 par value bond matures at par and has a coupon tate of 12% convertible seraiznnually. It is bovght ata price to yield 10% convertible serniannnally | the term of the bond is doubled, the price will increase by $50. Find the price of the year bond. For the bond in Example 6:3, determine the following: 2) Nominal yield, hased on the par value. ) Nominal yield, based on the redemption value. ©) Current yield 4) Yieldto matricy. 64 Premium and discount For a $1 bond the coupon rate is 150% of the yield rate and the premium is p. For another $1 bond with the sanc number of coupons and the same yield rate, the coupon rate is 75% of the yield rate. Express the price of the second bond as a function of p. For a certin period 4 bond amortization schedule shows that the amount for _amostization of premium is $5 and that the required interest is 75% of the coupon. Find the emount of the coupon, ‘A 10-year bond with semiannual coupons is bought at a discount to yield 9% convertible semiannually. Ifthe amount for accumulation of discount in the next-to-last coupon is $8, find dhe total amount for accumulation of discount during the first four years inthe bond amortization schedule. 4 $1000 par value five-year bond with a coupon rate of 10% payable semiannually and redeemable at par is bought to yield 12% convertible semiaunvally. Find the total of the interest paid column inthe bond amortization schedule.242 The theory of imerest 15, You are given: (A 10-year 8% semiannual coupon bond is purchased a a discount of X. (i) A 1G-year 9% semiannual coupon bond is purchased at a discount of ¥ (ii) A 10-year 10% semiannual coupon bond is purchased ata discount of 2X (iv) Attbonds were purchased atthe some yield rate and have par values of $1000, Calculate ¥. 16, a) Find the book values for the bond in Table 62 by the straight line method. 1) Find the book values forthe bond in Table 6.3 by the straight line method, 6) What can you conclude from a comparison of the answers in (a) and (b) with the true values from Tables 6.2 and 63? 65. Valuation between coupon payment dates 17. Arrange in increasing order of magnitude forthe three interim bow price methods: @) Plat price. ) Market price (book value). 18, Find the flat price, accrued interest, and market price (book value) two months after purchase forthe bond in Table 6.3. Use all three methods. 19. A $1000 bone with semiannual coupons at i”! = 6% matures at par on October 15, Z+15. The bond ia purchased on June 28, Zo yield the invector i) = 79%. What is ‘the purchase price? Assume siimple interest between bond coupon dates and use an ‘exact day count (see Appendix A), 66 Determination of yield rates 20. A $100 par value 12-year bond with 10% semiannual coupons is selling for $110, Find the yield rate convertible semiannually 4a) Using the exact method. 6) Using the refined version of the bond salesman’s method. 21. An investor boys two 20-year bonds, each having semiannual coupons and cach ‘maturing at pas. For each bond the purchase price produces the same yield rate. One bond has @ par valve of $500 and a coupon of $45. The other bond has a par value of $1000 and a coupon of $30, The dollar amount of premium on the first bond is twice as {eat as the dollar amount of discount on the second bond. Find the yield rate convertible semiannuallyBonds and osher securities. 243 22, A $100 bond with annual coupons is redeemable at par at the end of 15 years. At a purchase price of $92 the yield rate is exactly [% more than the coupon rie, Find the yield rate on the bond. (@ Ifthe annual coupon rate had been 5.25% instead of 4.20%, the price of the ‘bond would have increased by $100. (i) Atthe time of purchase, the present value of all the coupon payments is equal to the present value of the bond's redemption valve of $1000, Calculate i 6.7 Callable and putable bonds 24. A $1000 par value bond has 8% semiannual coupons and is callable atthe end of the ‘oth through the 15th years at par. (2) Find the price o yield 6% convertible semiannually. 16) Find the price to yield 10% convenible semiannually. ©) Ifthe bond in (b) is actually called atthe end of 10 years, find the yield rate, 4) Tf the bond is putable rather than callable, rework (a). 2) Ifthe bond is putabfe rather than callable, rework (b). 25. A $1000 par value 8% bond with quarterly coupons is callable five years after issue ‘The bond matures for $1000 atthe end often years and is sol to yield a nominal rate of {6% convertible quarterly under the assumption that the bord will not be called, Find the redemption value atthe end of five years that will provide the purchaser the same yield rate. Answer to the nearest dlr. 26. A $1000 par value 4% bond with semiannual coupons matures at the end of 10 years. ‘The bond is callable at $1050 at the ends of years 4 through 6, at $1025 at the ends of years 7 through 9, and at $1000 atthe end of year 10. Find the maximurn price that an investor can pay and sti! be certain of a yield rate of 5% convertible semiannually 27. A $1000 par value bond! with coupons at 9% payable semiannually was called for $1100 prior to maturity. ‘The bond was bought for $918 immediately after a coupon payment and was held to call. The nominal yield rate convertible semiannually was 10%. Calculate the number of years the bond was held. Answer to the nearest interger.244 The theory of interest 28, A $1000 par value bond pays aanuel coupons of $80, The bond is redeemable a par in 30 years, but i callable any time from the end ofthe year at $1050, Based on the ‘exited yield rate, an investor calculates the following potential purchase prices P= (Assuming the bondi called atthe end ofthe 10" year, P-=3957, 1) Assuming the bond is held unl matory, # = $897, The investor buys the bond atthe highest price that guarantees the desired yield rate regardless of when the bond is cllod. The investor holds the bond for 20 years, afer which time the bon is called. Calalatethe annual yield rate the investor eas. 68 Serial bonds 29. A $10,000 serial bond isto be redeemed in $1000 installments of principal per half-year ‘over the next five years. Interest atthe annual rate of 12% is paid semiannually on dhe balance oustanding. Tow iweh should an investor pay for this bond in order to produce a yield rate of 8% convertible semiannually? Answer to the nearest doar. 30. A $10,000 serial bond is to be redeemed in $500 installments of principal atthe end of ‘the ih through the 25th years from the date of issue. Interest at the rate of 6% is paid annually on the balance outstanding. What is the price to yield an investor 10% effective? Answer to the nearest dolla. 31. Find an expression for the present value of a $100,001 issue of serial bonds if it is ‘known thatthe yield rate is 125% of the coupon rate and cha the bonds are redeemable a par according tothe following schedule: Endof Years Amount Redeemable 3.8.11 $10,000 14,17 20,000 20 30,000 Allrates are semiannual, Express your answer strictly as a fnction of a's for various values of 6.9 Some generalizations 32, The price of a $100 bond, which matures inn years for $105, has semiancual coupons ‘of $4, and is bough ro yield an effective rate Z, cam be expressed as Avie y f Find A and B.