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EXERCISE

1. Suppose you buy a 7 percent coupon, 20-year bond today when it’s first issued. If interest

rate suddenly rises to 14 percent, what happens to the value of bond? Why?

2. Border Co issued 11-year bonds one year ago at a coupon rate of 8.2 percent. The bonds

make semiannual payments. If the YTM on these bonds is 7.4 percent, what is the current

bond price? If the current market price is RM1085.88, calculate the current yield? Will you

buy the bond?

3. Aragon has 10 percent coupon bonds on the market with nine years left to maturity. The

bonds make annual payments. If the bond sells at RM884.50, what is the YTM?

4. Super Co has bonds on the market making annual payments with 16 years to maturity, and

selling for RM870. At this price, the bonds yield 6.8 percent. What must the coupon rate be

on Super Co’s bonds?

5. HSH Bhd need to raise fund to finance a plant expansion. The company plans to issue a zero

coupon bonds to raise the money. The required rate of return on the bonds will be 10 percent.

What will these bonds sell for at issuance?

6. After a year, HSH Bhd’s bonds on the market are priced at RM275.87. Calculate the

expected rate of return for the bond.

Topic 2 Bond Valuation - ex