Chapter 4 Valuing Bonds Chemistry Worksheet With Answers Page 20
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21DIF: M
REF: 4.3 Types of Bonds
77. Suppose you have a chance to buy a Treasury strip. The strip is from a government bond with a 6%
coupon rate (face value of $1,000). You will receive this strip in one year and have a discount rate of
10%. What is the price you are willing to pay for this strip?
a. $36.87
b. $54.55
c. $60.00
d. $94.34
ANS: B
6%*1000 = $60
PV = $60/1.10
DIF: E
REF: 4.3 Types of Bonds
NARRBEGIN: EarthCOM
EarthCOM
th
On October 4
, 2000, long distance company, EarthCOM, issued bonds to finance a new wireless
th
product. The bonds were issued for 30 years (mature on October 4
, 2030), with a face value of
$1,000, and semi-annual coupons. The coupon rate on these bonds is 8% APR. Over the last 4
years, the company has experienced financial difficulty as the long distance market has grown more
competitive.
NARREND
78. Refer to EarthCOM. The risk associated with EarthCOM bonds has increased dramatically, as
investors now want a 15% APR return to hold the bonds. What price should the bonds trade at
th
TODAY (October 4
, 2004)?
a. $544.19
b. $545.66
c. $794.99
d. $800.15
ANS: A
n’ = 26, r’ = 7.50%, PV = ?, PMT = 8%*1000/2 = $40, FV = $1,000
PV = $544.19
DIF: H
REF: 4.2 Bond Prices and Interest Rates
NAR: EarthCOM
th
79. Refer to EarthCOM. Suppose that today (October 4
, 2002), EarthCOM admits to fraud in reporting
revenues over the last 3 years. The price of EarthCOM immediately tumbles to $500. What is the
new yield-to-maturity on EarthCOM bonds? (Express as an APR)
a. 16.04%
b. 16.21%
c. 18.12%
d. 20.77%
ANS: B
n’ = 52, r’ = YTM/2, PV = -$500, PMT = 8%*1000/2 = $40, FV = $1,000
r’ = 8.104%
YTM = 16.21%
DIF: H
REF: 4.2 Bond Prices and Interest Rates
NAR: EarthCOM
80. Which of the following statements are CORRECT?
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