Overview:
Respond to four questions and solve three computational problems related to valuation of bonds.
• Competency: Define finance terminology and its application within the business environment.
o Define a discount bond and a premium bond.
o Describe the relationship between interest rates and bond prices.
o Describe the differences between a coupon bond and a zero coupon bond.
o Calculate the yield to maturity on a coupon bond.
o Calculate the price of a zero coupon bond.
o Calculate the price of a coupon bond.
Competency: Evaluate the financial health of an organization.
o Explain what a call provision enables bond issuers to do.
o Explain why bond issuers would exercise a call provision.
Instructions:
• Respond to the questions and complete the problems.
Questions
In a Word document, respond to the following. Number your responses 1–4.
1. Explain what a call provision enables bond issuers to do. Why would bond issuers exercise a call provision?
2. Define a discount bond and a premium bond. Provide examples of each.
3. Describe the relationship between interest rates and bond prices.
4. Describe the differences between a coupon bond and a zero coupon bond.
Use references to support your responses as needed. Be sure to cite all references using correct APA style.
Problems
In either a Word document or Excel spreadsheet, complete the following problems.
• You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet.
• If you choose to solve the problems algebraically, be sure to show your computations.
• If you use a financial calculator, show your input values.
• If you use an Excel spreadsheet, show your input values and formulas.
In addition to your solution to each computational problem, you must show the supporting work leading to your solution.
Compute the following:
o Assuming semi-annual compounding, what is the price of a zero coupon bond that matures in 3 years if the market interest rate is 5.5 percent? Assume par value is $1000.
o Using semi-annual compounding, what is the price of a 5 percent coupon bond with 10 years left to maturity and a market interest rate of 7.2 percent? Assume that interest payments are paid semi-annually and that par value is $1000.
o Using semi-annual compounding, what is the yield to maturity on a 4.65 percent coupon bond with 18 years left to maturity that is offered for sale at $1,025.95? Assume par value is $1000.